On 18th of December, the European Parliament and the Council agreed a new framework for dealing with banks’ bad loans. They reached a provisional political agreement on capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets. The deal will now be submitted for endorsement by EU ambassadors according to the Council’s press release.
A bank loan is considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying or unlikely to be paying the agreed instalments or interest. When customers do not meet their agreed repayment arrangements, the bank must set aside more capital on the assumption that the loan will not be paid back. This increases the bank’s resilience to adverse shocks by facilitating private risk-sharing, while at the same time reducing the need for public intervention. In addition, addressing possible future NPLs is essential to strengthen the banking union. It preserves financial stability and encourages lending to create growth and jobs within the Union.
On the basis of a common definition of non-performing loans, 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.
The agreed measures will ensure that banks set aside funds to cover the risks associated with loans issued in the future that may become non-performing. This will prevent the accumulation of non-performing exposures on banks’ balance sheets and will ultimately enable banks to perform their indispensable role in financing the economy and supporting growth.
This measure is part of a set of actions presented by the Commission in March 2018 to tackle non-performing loans in the Union. It builds on ongoing efforts by Member States, supervisors, credit institutions towards a steady decrease in the number of NPLs across the Union.
Non-performing loans, or “NPLs”, are bank loans that are subject to late repayment or are unlikely to be repaid by the borrower.
The inability of borrowers to pay back their loans was aggravated during the financial crisis and the subsequent recessions. As a result, many banks saw a build-up of NPLs in their books. This was particularly acute in some EU countries.
While the average ratio of NPLs in the EU has decreased by more than one third since 2014, the total volume of NPLs remains high and some countries are making only slow progress in reducing them. High levels of NPLs can weigh on the economic growth of those countries as they reduce banks’ profitability and their ability to lend, particularly to SMEs.
For further information: Non-performing loans (NPLs)