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Financial regulations 13 Oct 2017

The ECB launches a consultation on new regulations for non-performing loans

The European Central Bank has launched a public consultation on an addendum to its guidance to European banks on non-performing loans (NPL). The addendum specifies that as of January 1, 2018 banks must completely provision for the unsecured portion of all new NPLs after two years at the latest and for the secured portion after seven years at the latest.


This addendum supplements the guidance that was published on March 20, 2017 and reinforces it in terms of fomenting the provision of these loans. In the text, the ECB specifies that banks will have to provision 100% of the loans that are newly considered non-performing according to the European Banking Authority (EBA) definition within two years for the unsecured portion and seven years for the secured portion. The new rule would enter into force on January 1st, 2018.

The ECB states in this addendum that this guidance should be considered “a supervisory tool” that helps ensure that banks do not have insufficient coverage for their non-performing exposures. The institution feels that this change in regulation will not have a major impact on banks.

Furthermore, the ECB will determine the need for additional supervisory measures based on banks’ contributions. The ECB consultation period runs from now through December 8th, and includes a public hearing on November 30th.

As a preliminary step, ECB Banking Supervision required banks with high NPL levels to submit strategies in the first half of the year that include NPL reduction targets. The ECB confirms that it “will continue to closely monitor progress on reducing NPLs, provisioning for NPL stocks and developments with respect to NPL strategies.” At the end of the first quarter of 2018, the European institution “will present its consideration of further policies to address the existing stock of NPLs.”

The ECB's banking supervision will continue to monitor closely the progress made in the reduction of doubtful loans, the level of provision and the evolution of default strategies"

What is a non-performing loan?

The EBA defines non-performing loans as loans that are 90 days past due, or those for which the borrower is unlikely to pay the full amount of the loan, regardless of the number of days overdue. Therefore, this new regulation will not initially apply to foreclosed assets.

What percentage of European banks’ loans are considered non-performing? According to EBA data from October 5, 2017, “The non-performing loans ratio (NPLs) confirmed its downward trend of previous quarters, decreasing by 30 bps to 4.5% (Q2 2017) and reaching its lowest level since Q4 2014. This reduction was mainly the result of one-off events that impacted all bank-size classes, in particular, smaller banks, which reduced their NPL ratios 17.7%.”

In Spain, according to BBVA Research estimates included in its June 2016 report, Banking Outlook, the system’s volume of NPLs "continue to decline significantly". The total amount of NPLs has fallen 13.5% over the past 12 months, with a cumulative decrease of €85 billion since the peak in 2013 (-43$ since then), with 40 consecutive months of declines, except for the month of November 2016.” The default rate fell below 9% for the first time since 2012.