The persistent overhang of Non-Performing Loans (NPLs) in Europe remains one of the greatest challenges and impediments to finalising the Banking Union. This point was emphasised by Andrea Enria in his speech of 14 June 2019, which welcomed the decline of Europe's total NPL stock from more than €1tn to around €580bn, but also pointed out that Europe's gross NPL ratio remains more than twice that of the US; that a large portion of the NPL stock is significantly aged (i.e. more than a quarter of NPLs in Europe are older than five years); and that the inflow of new NPLs is worryingly high at this point in the business cycle.

Mr Enria's comments also underlined the increasing weight - and changing shape - of measures around European banks' provisioning requirements. In particular, banks need to respond to three sets of calendar provisioning now in force:

1. The ECB's Addendum to its NPL Guidance (PDF 459 KB), which sets out supervisory expectations for the provisioning of exposures reclassified from performing to non-performing exposures (NPEs) after 1 April 2018 (the 'ECB Addendum').
2. The ECB's supervisory expectations for individual banks for the provisioning of the stock of NPLs (before 31 March 2018), as set out in its 2018 SREP letters.
3. The European Commission's amendment to Capital Requirements Regulation (CRR), which introduces a minimum loss coverage ratio for new loans becoming NPEs after 26 April 2019 (the 'statutory backstop').

The first two initiatives originate from the ECB and are strictly supervisory (Pillar II) in nature. In contrast, the third is legally binding (Pillar I) and applies to all EU credit institutions, investment firms and institutions active in the secondary market for NPLs.

As we noted in our previous NPL article, SSM banks are under no illusions about the importance of addressing these requirements. If anything, the entry into force of the amended CRR makes implementation an even greater priority than it was three months ago.

Unfortunately however, the increasing supervisory focus on NPLs and the 'calendar of provisioning' is growing more complex. After all, the three texts set out different provisioning timelines; have different scopes of application; set different provisioning ratios; and vary widely in terms of detail and granularity. Furthermore, Mr Enria's speech suggests that the ECB is soon likely to readjust its own supervisory guidance in order to ensure alignment with the de minimis rules of the statutory backstop.

In reality, banks have very little practical guidance on how to overcome these potential challenges. That poses a range of practical uncertainties. For example:

• Should the granularity of computations be carried out at exposure level or portfolio/aggregate level, despite the starting point of the supervisory dialogue at a “consolidated” level (i.e. solo, sub-consolidated or consolidated in line with the SREP approach)?
• If applicable, are aggregations of exposures feasible and acceptable?
• Could bottom-up methods (by exposures/ subsidiaries) lead to an amplification of provisioning compared with top-down approaches at a consolidated level?
• How should forbearance measures be considered and reconciled between the three sets of calendar provisioning?

Furthermore, these preliminary and immediate uncertainties are only half of the story. The three sets of calendar provisioning also have potentially far-reaching implications for banks' longer term decisions in terms of strategy, business model, operations and infrastructure. For example:

• Could the difficulty of reconciling group-wide accounting (IFRS/local GAAP) with national tax treatments have a detrimental effect on secondary markets for NPLs?
• With the three initiatives applying to newly impaired loans as well as existing NPLs, what might be the future implications for regulatory capital and banks´ business plans?
• How should these uncertainties be communicated to internal stakeholders as well as external stakeholders such as analysts, investors and ratings agencies?

In short, banks now have greater clarity than before over the requirements of the CRR. They also know that they need to act fast to address legal and supervisory expectations over their provisioning. But they still have many questions about critical, practical aspects of implementation.

In his speech, Mr Enria stated that supervisory teams closely monitor and challenge banks' evolving NPL strategies. He also offered reassurance that banks can solve the problems of NPLs with the help of the ECB. Banks will certainly be hoping that close engagement with their JSTs will help them to manage the immediate challenges of implementation - and longer-term questions over their credit operations.