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Investors in banks have been frustrated by different definitions and treatments across the eurozone, something that the ECB first tried to tackle with a standard definition for NPLs in the 2014 stress tests.
Now it is going one further, with standardised supervisory practices for how to handle NPLs, which banks have until November 15 to submit their views on. The guidelines will be non-binding, but banks that do not follow them may face “further supervisory action”, officials said.
Ahead of beginning that consultation, the ECB did a “stock taking” exercise on how bad loans were handled in eight countries including some of those hit worst by the eurozone crisis, including Portugal, Italy, Spain, Cyprus, Greece, Italy and Ireland. It also included Germany.
The review found the biggest differences in supervisory guidance for how bad loans were recognised and classified, how they were measured and provisions were calculated.
Smaller differences were also found in supervisory guidance for valuing collateral. On-site and off-site supervisory practices and methodologies were found to be largely harmonious across the eight.
“There are of course some differences but some of those relate to the fact that different countries are in a different places re the macro economic cycle,” said Sharon Donnery, the Central Bank of Ireland official who chaired the ECB’s working group. “The purpose of the stock take is to identify those and allow people to consider whether those issues should be addressed or not.”
Generally, the ECB noted that while it was clear that national authorities have “done a good job in engaging” with NPLs, “there is also still room to give further guidance to banks on NPLs, to monitor the implementation of that guidance and to take steps should banks fail to comply”.
The new guidelines being proposed would require all banks with a high level of NPLs to establish a “clear strategy” to manage and reduce their NPLs. That strategy will include targets for individual portfolios, as well as a “detailed implementation plan”. The average level of NPLs across the banks supervised by the ECB is 7 per cent.
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