Guidance to banks on non-performing loans (NPLs)

A number of banks in Member States across the Euro area are currently experiencing high levels of non-performing loans (NPLs) which ultimately have a negative impact on bank lending to the economy. In this regard, addressing asset quality issues is one of the key priorities for ECB banking supervision.

In this context, following a period of consultation, the ECB published in March 2017 a Guidance to banks on NPLs, with the objective of developing a consistent supervisory approach regarding the identification, measurement, management and write-off of NPLs. In particular, this document provides recommendations to banks and sets outs a collection of best practices regarding NPLs that will constitute ECB’s supervisory expectations from now on.

• The guidance includes recommendations on NPL strategy, governance and operations, forbearance, NPLs recognition, NPLs impairment measurement and write-offs, and collateral valuation for immovable properties.
• The guidance is addressed to significant banks under direct supervision of the ECB, including their international subsidiaries. Nevertheless, materiality and proportionality principles are applicable so certain parts of the guidance –those related to NPL strategy and to governance and operations- may be more relevant for banks with high levels of NPLs.
• The guidance is a non-binding instrument, although any deviations should be explained upon supervisory request. Moreover, the guidance is taken into consideration in the SSM regular Supervisory Review and Evaluation Process (SREP) and non-compliance may trigger supervisory measures.

The technical note prepared by Management Solutions’ R&D department includes an analysis of the main content of this guidance.

Executive summary

The guidance on NPLs provides recommendations on NPL strategy, governance and operations, forbearance, NPL recognition, impairment measurement and write-offs, and collateral assessment for immovable property.

Scope of application

Addressed to all significant institutions (SIs) supervised directly by the ECB. It is a non-binding instrument, although deviations should be explained upon supervisory request and it is integrated into SREP.

Main content

• NPL strategy: assessing the operating environment, developing the NPL strategy, implementing the operational plan, embedding the NPL strategy, and supervisory reporting.
• Governance and operations: steering and decision-making, NPL operating model, control framework, NPL monitoring, early warning systems, and supervisory reporting.
• Forbearance: forbearance options and viability, forbearance processes, supervisory reporting and disclosure.
• NPL recognition: application of NPE definition, link between NPE and forbearance, further aspects of NPE definition, regulatory and accounting definitions, and disclosure.
• NPL impairment measurement: individual and collective estimation of provisions, other aspects of impairment, NPL write-off, timeliness of provisioning and write-off, procedures, supervisory reporting and disclosure.
• Collateral valuation: immovable property: governance, procedures and controls; frequency and methodology of valuations, valuation of foreclosed assets, and disclosure.

Download the technical note by clicking here.