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Non-performing exposures: timely provisioning and write-offs

Non-performing exposures

The European Central Bank has published a consultation paper on additional guidance to banks on supervisory expectations for minimum levels of provisioning for new non-performing exposures (NPEs).


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The European Central Bank has published a consultation paper on additional guidance to banks on supervisory expectations for minimum levels of provisioning for new non-performing exposures (NPEs). The consultation period runs to 8 December 2017, and includes a public hearing on 30 November 2017. Following consultation, this additional guidance will be incorporated into the ECB's March 2017 Guidance on NPLs.

The proposed additional guidance reinforces and supplements the ECB's March 2017 Guidance by specifying quantitative supervisory expectations - the ECB calls these “prudential provisioning backstops” - concerning the minimum levels of prudential provisions against NPEs. The expectations are based on the length of time an exposure has been classified as non-performing and on any collateral held.

The EBA is working on turning the ECB's March 2017 Guidance on NPLs into EBA guidelines that would apply to all EU banks. The proposed additional guidance may be included in the EBA guidelines.

Many banks are concerned that the additional guidance may have a significant impact on their provisioning for NPEs.


The prudential provisioning expectations will apply to all exposures that are newly classified as non-performing in line with the EBA definition as of 1 January 2018.

The ECB is proposing that banks should provision for 100 percent of the unsecured part of a NPE two years after an exposure has been classified as non-performing, and for 100 percent of the secured part after seven years. Moreover, to avoid cliff edge effects, these provisions should be implemented in at least a linear path from the moment of NPE classification until the moment when 100 percent provisioning is expected.

The proposed backstop is not intended to be a best practice timetable for provisioning, but rather a supervisory tool to ensure that banks have sufficient provisioning coverage against their NPEs. Banks should therefore continue to book accounting provisions in line with their assessment and existing accounting principles - the ECB expects this to result in the backstop not having any effect in the vast majority of cases. The challenge to banks will involve running two parallel systems of provisioning.  Ireland as a high NPL country will come under close scrutiny from the ECB to see how local systemic banks are meeting this challenge.

Acceptable collateral for fully or partially securing NPEs includes all types of immovable property (valued in accordance with the March 2017 Guidance) and other collateral or credit risk protection that meet the criteria set out in the Capital Requirements Regulation. If collateral has not been realised (for whatever reason, including legal proceedings) after a period of several years from the date when the underlying exposure was classified as non-performing, the collateral is deemed to be ineffective and the exposure should then be treated as unsecured. This is why full provisioning is required after seven years. Once again, Irish banks may struggle with this given the difficulty in realizing collateral through the legal process. 

Banks are expected to explain any deviation from the guidance to supervisors. Deviations from the backstops are possible if a bank can demonstrate that the calibration of a backstop is not justified for a specific portfolio or exposure, or if the application of the backstop is not reasonable in justified circumstances (such as the pulling effect on a debtor's performing exposures).

Banks will be expected to publicly disclose their NPE coverage according to the length of time of non-performance, and thus whether they are meeting this additional guidance.

With regard to NPE stocks, the ECB has already required banks with high levels of NPEs to submit NPE strategies, including reduction targets. The ECB will continue to monitor progress in reducing stocks of NPEs, and is expected by the end of the first quarter of 2018 to present further policies to address the existing stock of NPEs. 

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