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Be aware of the differences: ECB’s second stocktake of national NPL frameworks across the EU

Alert from the ECB office

The ECB has published its second stocktake of national supervisory practices and legal frameworks related to Non-Performing Loans (NPLs) for 19 EU-countries.


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As part of its supervisory priorities for 2017, the ECB remains intensively active with its efforts to solving Europe’s € 1 trillion Non-Performing Loans (NPLs) problem. Following the official publication of the final ECB guidance to banks on NPLs, the ECB has published on June 30 its second stocktake on NPLs. This comprehensive and 278-page stocktake analyses the situation across 19 EU-countries as per December 2016 in regards to national supervisory practices and legal frameworks related to NPLs. It identifies progress and remaining impediments in light of continued efforts for harmonization of the NPL frameworks in the banking union.

Eleven new countries, cutoff between five and six percent, push on national legislators

  • Addition of low NPL countries: There are no major changes for countries that have already been included in the first publication of the stocktake exercise (i.e. for Cyprus, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). Instead, the report now also includes country reports for another 11 (low NPL) countries that were not included in the first report. 
  • Cutoff-rate: The ECB defines high NPL countries as having “NPL levels considerably higher than the EU average”. The cutoff-rate in this report between high/low NPL countries is between 5 and 6 percent (see figure 1), which may be an indicator of intensity of country focus of the ECB in addition to the emphasis of the individual high NPL banks across Europe. Improving NPL management: Not surprisingly, the ECB observes that high NPL-countries have addressed the NPL-management of their banks to a higher extent (such as Ireland or Spain) compared to low-NPL countries (see first line in figure 1).
  • Legal backlogs: Inadequacies with legal and judicial frameworks remain key impediments to NPL resolution in many high NPL countries, with the absence of out-of-court settlements accentuating the issue. This is clear push on national legislators and call for further juridical reforms. Legal impediments appear to be particular relevant for Cyprus, Greece and Italy (see second line in figure 1). The ECB also states that some low-NPL-countries are not as prepared as they could be when considering out-of-court mechanisms (e.g. in enforcing collateral or processing corporate and household insolvency claims).
Figure 1
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Source: ECB, EBA Risk Dashboard, KPMG

Figure 1: This figure illustrates the main findings of the ECB’s stocktake and represents an aggregation of the single results for each country assessment by national competent authorities and the ECB. The first line indicates the recent efforts taken by national regulators/supervisors regarding NPL-management at banks (i.e. supervisory regime and practices); the second line indicates legal impediments for reducing the stock of NPLs (i.e. the legal, judicial and extrajudicial framework); the third line indicates informational impediments (i.e. the information framework). For the first line, a full circle indicates a large number of recent regulatory/supervisory measures (compared to other EU-countries). For the second/third line, a full circle indicates a large number of legal/informational impediments that have been identified by the ECB and NCA’s.

Now an integral part of European banking supervision: Assessment of banks NPL-management

While a country classification of high or low NPL by the ECB does not necessarily dictate the same classification for all banks in the country, this is a good indicator as to which country the ECB may monitor more closely. This is useful information for JSTs to support decision on supervisory actions for low/high-NPL banks from a European perspective. It also provides the NCAs with a comparison to their peers and a point or reference on how they position themselves in Europe. On an operational level, the report also includes a number of additional insights for banks that are in the process of establishing compliance of their NPL-framework with ECB’s NPL guidance. For example, the ECB states that

  • The implementation of the NPL guidance within significant institutions (SIs) will be an important element of the supervisory assessment. This indicates that the ECB will perform regular assessments of banks’ NPL-framework (e.g. within the Supervisory Review and Evaluation Process, SREP). The ECB further emphasises that the second and third lines of defence support are essential for the prompt identification and management of NPLs and therefore likely to be assessed in more detail.
  • On-site inspections of arrears/NPLs are an important supervisory tool to detect emerging NPL-issues at an early stage. In particular, the assessment of the full compliance with EBA ITS on NPE/forbearance is mentioned as an essential supervisory tool. Banks therefore should be prepared for the fact that the compliance with EBA ITS on NPE/forbearance is one major element in JST’s playbook within the NPL-assessment.
  • “Strong supervisory actions”, such as a guidance on internal best practices, on strategy and governance, and on the recognition and measurement of NPLs, combined with potential additional Pillar 2 measures, are deemed to be adequate – an indication that the ECB will likely use a wide range of supervisory tools to ensure that European banks are compliant with the principles set out in the NPL guidance.
  • A number of low-NPL jurisdictions are in the process of considering whether to additionally apply the ECB’s guidance to Less Significant Institutions. Such an increase of the NPL guidance’s scope would contribute to further harmonisation within the banking union but might also increase the regulatory burden for LSIs (see also our article).

What banks should do now and investors should know

Clearly, full compliance with existing EBA-standards on NPE/forbearance appears to be essential for the ECB and banks should prepare the supervisory dialogue accordingly and also take into account the main findings of this stocktake when implementing the ECB’s NPL guidance. Moreover, having a good visibility on the country specific challenges (outside of the banks’ control) is very informative to banks in assessing how this may impact their implementation of the ECB guidance. The report is also a valuable source for banks with operations in multiple EU-countries.

For investors, the stocktake further increases the transparency about the European NPL market and refines expectations on future NPL-flows on country-level. The report also may reflect a common understanding of key stakeholders on existing impediments and contribute to the discussion around more comprehensive measures to solve Europe’s € 1 trillion NPL-problem.
For further details on this topic, please contact Eric Cloutier ( or David Nicolaus ( from KPMG’s ECB Office.

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