On March 14, 2018 the European Commission ("EC") published a package of proposals aimed at facilitating the reduction of the current stock of non-performing loans ("NPLs") held by European banks and mitigating their build-up in the future. The EC proposals include the introduction of common minimum regulatory provisioning levels for newly originated NPLs, harmonized provisions on out-of-court recovery of secured loans, credit purchasers and servicers and a blueprint on the set-up of national asset management companies ("AMCs") dealing with NPLs.
On March 15, 2018 separate guidelines on minimum regulatory provisioning levels for NPLs were published by the European Central Bank ("ECB") in the awaited addendum (the "ECB Addendum") to its one year old Guidance to banks on NPLs (the "NPLs Guidance").
The new measures are expected to significantly affect the NPL strategy of European banks, especially in countries with high NPL levels. But the consequences may be even more far-reaching, as these rules will likely affect the way in which lending is conducted and loans are collateralized and enforced in Europe.
EU institutions have devoted significant attention to the NPL problem in the last few years and the measures taken at European and national level, coupled with a moderate growth pace, have progressively led to falling NPL ratios in nearly all EU Member States1.
However, the legacy stock of troubled assets and distressed loans accumulated by European banks is still one of the major impediments to a full economic recovery and increase of credit supply in some EU Member States. The total volume of NPLs in the EU is in the region of EUR 910 billion and NPLs ratios diverge significantly across EU Member States2. The existing discrepancies among NPLs ratios in the Eurozone are also hindering the on-going political negotiations on the establishment of a European Deposit Insurance Scheme (EDIS), which is the missing pillar of the European Banking Union.
In response to these concerns and with a view to overcome certain structural inefficiencies of the internal market, on July 11, 2017 the Council approved its "Action Plan to tackle non-performing loans in Europe", promoting the adoption of a combined approach of different policy actions in the areas of regulatory supervision, insolvency and debt recovery frameworks, secondary markets for distressed assets, and restructuring of the banking system. Some of these actions have now been taken by the EC and the ECB through a package of measures that are expected to significantly affect EU banks.
Overview of the New EU Measures3
On March 14, 2018 the EC published:
- A proposal for a Regulation (the "Proposed Regulation") amending Regulation (EU) 575/2013 ("CRR") as regards minimum loss coverage for non-performing exposures ("NPEs") 4. The Proposed Regulation will impose a "Pillar 1" minimum regulatory backstop for the provisioning of NPEs by EU banks – which is meant to apply to all exposures originated after March 14, 2018. Any failure to meet such provisioning floor will trigger deductions from Common Equity Tier 1 ("CET1") items.
- A proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral (the "Proposed Directive"). The Proposed Directive is aimed at developing the EU secondary market for NPLs and ensuring a more efficient value recovery for secured creditors through accelerated out-of-court enforcement procedures. The transposition deadline of the Proposed Directive is currently set on December 31, 2020.
- A blueprint on AMCs (the "AMC Blueprint") accompanying the EC’s Second Progress Report on NPLs. The AMC Blueprint contains practical and non-binding recommendations on how national AMCs can be set up by EU Member States without infringing EU State aid rules, leveraging on the previous experiences of the EC and EU Member States with publicly-sponsored troubled assets relief programs.
In parallel with the above proposals – and notwithstanding the objections raised by the European Parliament on the draft version of the document published in October 2017 – the ECB issued its controversial ECB Addendum on March 15, 2018, supplementing the NPLs Guidance and detailing the ECB supervisory expectations as regards the minimum levels of NPLs provisioning. While the goals pursued by the ECB under the ECB Addendum are the same as those underlying the Proposed Regulation, there are some significant differences between the EC and ECB measures on NPLs which need to be reconciled.
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1 Based on the data provided in the "Second Progress Report" on the reduction of NPLs published by the EC on March 14, 2018 (the "Second Progress Report on NPLs") the overall NPL ratio in the EU at the end of Q3 2017 declined to 4.4% of total loans (i.e. down by roughly 1% year-on-year, 0.2% quarter-on-quarter).
2 See the data provided by the EC in the Second Progress Report on NPLs. While NPLs ratios at the end of Q3 2017 are close to 2-3% of total loans in a number of EU Member States (e.g. Belgium, Estonia, Germany and the Netherlands) or even lower in others (e.g. Luxembourg, Finland and Sweden), some of the countries that were significantly hit by the financial crisis are still undergoing the burden of substantial NPL ratios (e.g. 10-15% in Ireland, Italy and Portugal, with a peak of 32.1% in Cyprus and 46.7% in Greece).
3 This client alert is focused on the rules and indications respectively set forth in the Proposed Regulation and the ECB Addendum on the minimum regulatory provisioning requirements for NPLs. A separate client alert will focus on the Proposed Directive and the AMC Blueprint.
4 Under the current framework, NPEs include NPLs, non-performing debt instruments and non-performing off-balance-sheet items. However, in this alert the two words are used interchangeably.
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