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The European Central Bank (ECB) announced further steps in its supervisory approach for addressing the stock of non-performing loans (NPLs) in the euro area. The approach follows the work that has already been undertaken in this area, namely the banks’ NPL reduction strategies, and the addendum for provisioning for new NPLs.
It creates a consistent framework to address the stock of NPLs as part of the supervisory dialogue through bank-specific supervisory expectations aimed at achieving adequate provisioning of legacy NPLs thereby contributing to the resilience of the euro area banking system as a whole.
Under this approach ECB Banking Supervision will further engage with each bank to define its supervisory expectations. The bank-specific supervisory expectations are based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratio and main financial features. The aim is to ensure continued progress to reduce legacy risks in the euro area and achieve the same coverage of the stock and flow of NPLs over the medium term.
The work so far has led to significant progress in reducing NPLs with the NPL ratio of significant institutions decreasing from 8 percent in 2014 to 4.9 percent in Q4 2017. Nevertheless, the current aggregate level of NPLs remains far too high compared to international standards and further efforts are necessary to ensure that the NPL issue in the euro area is adequately addressed.