A bank loan is considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying the agreed instalments or interest. When customers do not meet their agreed repayment arrangements for 90 days or more, the bank must set aside more capital on the assumption that the loan will not be paid back. This increases bank’s resilience to adverse shocks by facilitating private risk-sharing, while at the same time reducing the need for public risk-sharing. Further, addressing possible future NPLs is essential to strengthen the Banking Union, as well as preserves financial stability and encourages lending to create growth and jobs within the Union.
On the basis of a common definition of non-performing exposures, the proposed new rules introduce a "prudential backstop", i.e. common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing. In case a bank does not meet the applicable minimum level, deductions from banks' own funds would apply.
According to the Council's position, different coverage requirements would apply depending on the classifications of the NPLs as "unsecured" or "secured" and whether the collateral is movable or immovable:
Regarding NPLs secured by immovable collateral (commercial or residential real estate) it can be reasonably assumed that immovable property will have a remaining value for a longer period of time after the loan turned non-performing. Thus, the proposal provides a gradual increase of the minimum loss coverage level over a period of 9 years. The full coverage of 100% for NPLs secured by movable and other CRR eligible collateral will have to be built up after 7 years.
Unsecured NPLs require higher and timelier minimum loss coverage because they are not backed by collateral. Therefore, the maximum coverage requirement would apply fully after 3 years.
The new rules will apply only to loans allocated after the date of entry into force of the regulation.
Press release
© European Council
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