Commission presents measures to accelerate the reduction of non-performing loans in the banking sector

On 14 March, the European Commission proposed an ambitious and comprehensive package of measures to tackle non-performing loans (NPLs) in Europe.

The proposal is delivering on the Council's Action Plan to address the high stock of NPLs and it builds on ongoing efforts by Member States, supervisors, credit institutions and the EU that have led to stocks of NPLs declining in recent years across banks and EU countries, as outlined in the second progress report on the reduction of NPLs in Europe presented by the Commission on the same date.

This package - which takes the form of a Regulation, a Directive and a technical blueprint - sets out a comprehensive approach with a mix of complementary policy actions that target four key areas:

• ensuring that banks set aside funds to cover the risks associated with loans issued in the future that may become non-performing;
• encouraging the development of secondary markets where banks can sell their NPLs to credit servicers and investors;
• facilitating debt recovery;
• assisting Member States by providing non-binding guidance for establishing Asset Management Companies (AMCs) or other measures dealing with NPLs.

The proposed Regulation amends the Capital Requirements Regulation (CRR- Regulation (EC) no. 575/2013) introducing common minimum coverage levels for newly originated loans that become non-performing. In case a bank does not meet the applicable minimum level, deductions from banks' own funds would apply. The measure addresses the risk of not having enough funds to cover losses on future NPLs and prevents their accumulation.

The minimum coverage requirement increases gradually depending on how long an exposure has been classified as non-performing. The Commission recommends banks fully cover the unsecured parts of distressed loans two years after they become non-performing. But while the Commission would grant banks eight years to cover the secured parts, the European Central Bank’s guidelines designed to prevent the accumulation of non-performing loans on banks’ balance sheets published on March 15 would grant banks seven years.

Once approved, the Regulation shall be binding in its entirety and directly applicable in all Member States.

The proposed Directive, first of all, will foster an accelerated out-of-court enforcement of loans secured by collateral. Under the proposal, banks and borrowers can agree in advance on an accelerated mechanism to recover the value from loans guaranteed with collateral. Consumer loans are excluded.

The Directive also provides for specific provisions aiming at developing secondary markets for NPLs by harmonizing requirements and creating a single market for credit servicing and the transfer of bank loans to third parties across the EU. The proposed Directive defines the activities of credit servicers, sets common standards for authorisation and supervision and imposes conduct rules across the EU. It means that operators respecting those rules can be active throughout the EU thanks to a passporting regime, without separate national authorization requirements.

Member States shall adopt and publish, by 31 December 2020 at the latest, the laws, regulations and administrative provisions necessary to comply with the proposed Directive.

This package is accompanied by a technical blueprint for how to set up national AMCs, in full compliance with EU banking and State aid rules. While considering AMCs with a State aid element as an exceptional solution, the blueprint clarifies the permissible design of AMCs receiving public support. The blueprint also sets out alternative impaired asset measures.

The proposals will now be discussed by the European Parliament and the Council.