The European Banking Authority (EBA) launched a consultation on a draft set of guidelines to properly manage non-performing exposures (NPEs), with a particular focus on non-performing loans (NPLs). The crisis left as its legacy a considerable amount of non-performing loans in banks’ balance sheets. Furthermore, a frail financial sector is more prone to suffer from new NPLs in the nearby future.
In July 2017, the European Council concluded an Action Plan to tackle non-performing loans (NPLs) in Europe. The EBA, along with other bodies and institutions, was invited by the Council to contribute to address the existing stock of non-performing loans (NPLs) as well as to prevent the emergence and accumulation of new NPEs on banks’ balance sheets.
The guidelines are designed primarily to reduce NPEs on banks’ balance sheets by providing supervisory guidance to ensure that credit institutions effectively manage NPEs and forborne exposures (FBE) in their balance sheets.
The development of an NPE strategy is the core building block of the guidelines for banks’ NPE management. The NPE strategy should be built on an assessment of the operating environment, should set out time-bound realistic, yet ambitious reduction targets and consider all available strategic options to reduce NPEs.
The guidelines outline the key elements of the governance and operations of a NPE workout framework with key aspects related to steering and decision making, the NPE operating model, internal control framework and NPE monitoring as well as early warning processes.
Credit institutions with elevated levels of NPEs should establish a NPE strategy, as part of their overall strategy, and related governance and operational arrangements. Effective governance covers all responsibilities that banks have, including to treat customers fairly.