Coronavirus response: Tackling non-performing loans (NPLs) to enable banks to support EU households and businesses

The European Commission has today presented a strategy to prevent a future build-up of non-performing loans (NPLs) across the European Union, as a result of the coronavirus crisis. The strategy aims to ensure that EU households and businesses continue to have access to the funding they need throughout the crisis.

Banks have a crucial role to play in mitigating the effects of the coronavirus crisis, by maintaining the financing of the economy. This is key in order to support the EU’s economic recovery. Given the impact coronavirus has had on the EU’s economy, the volume of NPLs is expected to rise across the EU, although the timing and magnitude of this increase is still uncertain. Depending on how quickly the EU’s economy recovers from the coronavirus crisis, banks’ asset quality – and in turn, their lending capacity – could deteriorate.

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said: “History shows us that it is best to tackle non-performing loans early and decisively, especially if we want banks to continue supporting businesses and households. We are taking preventive and coordinated action now. Today’s strategy will help contribute to Europe’s swift and sustainable recovery by helping banks to offload these loans from their balance sheets and keep credit flowing.”

Mairead McGuinness, Commissioner responsible for financial services, financial stability and the Capital Markets Union, said: “Many firms and households have come under significant financial pressure due to the pandemic. Making sure that European citizens and businesses continue to receive support from their banks is a top priority for the Commission. Today we put forward a set of measures that, while ensuring borrower protection, can help prevent a rise in NPLs similar to the one after the last financial crisis.”

In order to give Member States and the financial sector the necessary tools to address a rise of NPLs in the EU’s banking sector early on, the Commission is proposing a series of actions with four main goals:

1. Further developing secondary markets for distressed assets: This will allow banks to move NPLs off their balance sheets, while ensuring further strengthened protection for debtors. A key step in this process would be the adoption of the Commission’s proposal on credit servicers and credit purchasers which is currently being discussed by the European Parliament and the Council. These rules would reinforce debtor protection on secondary markets. The Commission sees merit in the establishment of a central electronic data hub at EU level in order to enhance market transparency. Such a hub would act as a data repository underpinning the NPL market in order to allow a better exchange of information between all actors involved (credit sellers, credit purchasers, credit servicers, asset management companies (AMCs) and private NPL platforms) so that NPLs are dealt with in an effective manner. On the basis of a public consultation, the Commission would explore several alternatives for establishing a data hub at European level and determine the best way forward. One of the options could be to establish the data hub by extending the remit of the existing European DataWarehouse (ED).
2. Reform the EU’s corporate insolvency and debt recovery legislation: This will help converge the various insolvency frameworks across the EU, while maintaining high standards of consumer protection. More convergent insolvency procedures would increase legal certainty and speed up the recovery of value for the benefit of both creditor and the debtor. The Commission urges the Parliament and Council to reach an agreement swiftly on the legislative proposal for minimum harmonisation rules on accelerated extrajudicial collateral enforcement, which the Commission proposed in 2018.
3. Support the establishment and cooperation of national asset management companies (AMCs) at EU level: Asset management companies are vehicles that provide relief to banks that are struggling by enabling them to remove NPLs from their balance sheets. This helps banks re-focus on lending to viable firms and households instead of managing NPLs. The Commission stands ready to support Member States in setting up national AMCs – if they wish to do so – and would explore how cooperation could be fostered by establishing an EU network of national AMCs. While national AMCs are valuable because they benefit from domestic expertise, an EU network of national AMCs could enable national entities to exchange best practices, enforce data and transparency standards and better coordinate actions. The network of AMCs could furthermore use the data hub to coordinate and cooperate with each other in order to share information on investors, debtors and servicers. Accessing information on NPL markets will require that all relevant data protection rules regarding debtors are respected.
4. Precautionary measures: While the EU’s banking sector is overall in a much sounder position than after the financial crisis, Member States continue to have varying economic policy responses. Given the special circumstances of the current health crisis, authorities have the possibility to implement precautionary public support measures, where needed, to ensure the continued funding of the real economy under the EU’s Bank Recovery and Resolution Directive and State aid frameworks

Background

The Commission’s NPL strategy proposed today builds upon a consistent set of previously implemented measures. In July 2017, finance ministers in the ECOFIN agreed on a first Action Plan to tackle NPLs.

In line with the ECOFIN Action Plan, the Commission announced in its Communication on completing the Banking Union of October 2017 a comprehensive package of measures to reduce the level of NPLs in the EU. In March 2018, the Commission presented its package of measures to tackle high NPL ratios.

The proposed measures included the NPL backstop, which required banks to build minimum loss coverage levels for newly originated loans, a proposal for a Directive on credit servicers, credit purchasers and for the recovery of collateral and the blueprint for the set-up of national asset management companies. To mitigate the impact of the coronavirus crisis, the Commission’s Banking Package from April 2020 has implemented targeted “quick fix” amendments to the EU’s banking prudential rules. In addition, the Capital Markets Recovery Package, adopted in July 2020, proposed targeted changes to capital market rules to encourage greater investments in the economy, allow for the rapid re-capitalisation of companies and increase banks’ capacity to finance the recovery.

The Recovery and Resilience Facility (RRF) will also provide substantial support to reforms aimed at improving insolvency, judicial and administrative frameworks and underpinning efficient NPL resolution.

For More Information

Commission communication

Proposal for a Directive on credit servicers, credit purchasers and for the recovery of collateral

Commission STAFF WORKING DOCUMENT on AMC Blueprint Accompanying the document Communication from the Commission –

Second Progress Report on the Reduction of Non-Performing Loans in Europe

Questions and Answers