NPL framework

Although NPLs have started to decline, a number of banks in Member States across the Euro area are still experiencing high levels, which ultimately have a negative impact on bank lending to the economy. In this context, in July 2017, the European Council concluded an Action Plan to tackle NPLs in Europe in order to prevent the emergence and accumulation of new NPEs on banks’ balance sheets.

According to this Action Plan, the ECB published Final Guidance to banks on NPLs with the aim at developing a consistent supervisory approach (supervisory expectations) regarding the identification, measurement, management and write-off of NPLs in March 2017.

Further, in March 2018 the ECB published the final Addendum to the ECB Guidance to banks on NPLs, specifying quantitative supervisory expectations concerning the minimum levels of prudential provisions expected for NPEs; in October 2018 the EBA published the Guidelines (GL) on management of NPEs and FBEs which specify, among others, sound risk management practices for managing NPE and FBE; and in April 2019 the EP and Council published the Regulation 2019/630 amending the CRR as regards minimum loss coverage for NPEs which aims at ensuring banks set aside funds to cover the risks associated with loans issued in the future that may become NPLs.

This Technical Note summarises the content of the NPL framework which includes references to the ECB Guidance to banks on NPLs and Addendum to the ECB Guidance on NPL, the EBA GL on management of NPE and FBE, and the Regulation 2019/630 amending the CRR on NPLs. Further, the annex covers the EBA GL on disclosure of NPE and FBE.

Executive Summary

The ECB Guidance on NPLs and the EBA GL on NPE and FBE cover recommendations on NPLs. Further, the ECB Addendum provides information about the prudential provisioning expectations, whereas the Regulation 2019/630 aims at ensuring sufficient loss coverage. Moreover, in the annex the EBA GL on disclosure of NPE and FBE sets definitions and templates regarding the level of NPEs.

Area of application

The ECB Guidance and the Addendum on NPLs are addressed to significant institutions; the EBA GL on NPE and forbearance are addressed to all credit institutions; and the Regulation 2019/630 on minimum loss coverage for NPEs of the EP and the Council applies to all CRR institutions.

Main content

ECB Guidance on NPL vs EBA GL on NPE and forbearance. These documents cover:

• NPL strategy (e.g. assessing the operating environment, developing the NPL strategy, and implementing the operational plan).
• Governance and operations (e.g. steering and decision-making, NPL operating model, and control framework).
• Forbearance (e.g. forbearance options and viability).
• NPL recognition (e.g. application of NPE definition, and link between NPE and forbearance).
• NPL impairment measurement (e.g. individual and collective estimation of provisions, and other aspects of impairment).
• Collateral valuation for immovable and movable property (e.g. governance, procedures and controls).
• Supervisory reporting and evaluation of management of NPLs.

The ECB Addendum to the ECB Guidance on NPL. This Addendum sets out definitions to be considered, such as new NPEs, NPE vintage, eligible credit protection to secure exposures, etc. Further, it also provides information on prudential provisioning expectations (e.g. minimum level).

The Regulation 2019/630 amending the CRR on minimum loss coverage for NPE. This Regulation introduces amendments to the CRR regarding the definition of NPE, forbearance measures, the deduction of NPEs, the introduction of a principle of prudential backstop, etc.

Annex: The EBA GL on disclosure of NPE and FBE sets out definitions and templates.

Download the technical note.