Non-performing loans: banks need to mitigate the risk of potential losses

ecb 2019

(Maryna Yazbeck, Unsplash)

This article is brought to you in association with the European Parliament.


Parliament has adopted, on Thursday, new EU rules for standard minimum coverage of bad loans.

Measures to mitigate the risk of possible, future, non-performing loans (NPLs) accumulating due to the recessions brought about by the 2008 financial crisis were approved by the Parliament, with 426 votes to 151 and 22 abstentions.

They will help strengthen the Banking Union, preserve financial stability as well as banks’ profitability and encourage lending, which create jobs and growth across Europe.

NPLs are loans that are either more than 90 days overdue, or are unlikely to be fully repaid. To complement the existing rules relating to own-funds, Parliament voted to introduce common minimum loss coverage levels.

Each bank will have to set an amount of money aside, to cover losses caused by future loans that could become non-performing. Coverage requirements for banks will, however, vary, depending on whether NPLs are secured by eligible credit protection i.e. collateral or unsecured. The kind of collateral being used, such as real estate, will be also taken into account

The new rules, which have already been informally agreed with Council, will only apply to NPLs taken out after the entry into force of the Regulation.

Quotes

Esther de Lange (EPP, NL), the co-rapporteur said: “I am proud that it took only 12 months for the proposal to be adopted as law. Now we have legally binding levels for new NPLs in all banks for the first time ever, alongside the bank-by-bank requirements set by the Single Supervisory Mechanism (SSM).”

“We want to improve the overall health of the EU’s banking sector and make our financial system more stable. We have to address this problem now and not leave it up to the next generation.”

Roberto Gualtieri (S&D, IT), the co-rapporteur said: “This new regulation is an additional important step forward in reducing risks in the banking sector. The new practical backstop will ensure that non-performing exposures are provided more prudently, while avoiding negative unintended consequences on the real economy, on consumers and on all the other borrowers”.

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