The addendum contains quantitative guidelines designed to promote in the future more timely provisioning practices on NPL. It integrates the aspects Qualifications addressed in the NPL guidelines published in March 2017 by the European Central Bank (ECB).

The addendum is applied in a non-binding manner to all significant institutions. However, any deviations from what indicated in the addendum must be adequately motivated by banks and could give rise to supervisory measures  if they are not supported by sufficiently solid arguments and evidence. The expectations on the minimum levels of prudential provision will apply to all the new exposures classified as impaired in line with the definition of the EBA starting from 1 January 2018.

The addendum introduces a prudential tool that allows banks to use the deductions from own funds referred to in Article 3 of the Capital Requirements Regulation, CRR,  as an alternative to accounting provisions in order to meet supervisory expectations. Moreover, the accounting provisions will be taken into full consideration in the analysis compliance with the minimum prudential provision levels, including potential increases in provisions deriving from the entry into force of IFRS 9 in 2018. It should be noted that these increases deriving from the first application of IFRS 9 do not they are relevant for income statement purposes and that it will be possible to distribute over time any effects on capital.

The guidelines apply only to new NPLs. Their precise impact therefore depends from the inflows of impaired loans, which in the recent past have fallen to the level of Furthermore, the guidelines only apply to those banks that still have unsecured parts of NPL without coverage after two years or parts guaranteed without coverage after 7 years. Regarding the potential impact on the market secondary to NPL, the expectations concern the net exposure of NPLs, net of prudential provisions. The guidelines published on March 20 refer to the sale of NPL as one of the instruments available to deal with the high levels of impaired loans.

The ECB Banking Supervision, through joint supervisory groups (JSTs), stands evaluating the degree of credibility and ambition of the strategies of significant institutions, also defined to reduce the outstanding amounts of NPLs through objectives of reduction set by the banks. It should be kept in mind that there is been a reduction of the amounts of NPL of significant institutions, from € 950 billion in the first quarter of 2016 to 865 in the first quarter of 2017. We will continue to follow carefully the progress made by the individual banks in the reduction of credits deteriorated and will present themselves, by the end of the first quarter of 2018, considerations on further policies to cope with outstanding NPL stocks; including appropriate transitional provisions.

The JSTs have actively engaged with the banks in the phase following the publication of the guidelines on NPLs to ensure that significant bodies identify and fill potential gaps in terms of compliance. Furthermore, some banks have started to tackle NPL issues more actively, increasing internal efforts in recovery capacities and partly also in terms sales and securitization. However, some intermediaries do not show yet enought determination and ambition to reduce their high levels of NPL.

Banks should report annually on the achievement of the minimum prudential provision levels defined Addendum. Where coverage does not fully meet the expectations of supervision illustrated in the addendum, banks should provide reasons and evidence to support the deviations. In case of insufficient reasons, the Supervision ECB Banking will consider the adoption of supervisory measures.

The determination of the final calibration of the provisioning levels defined in the addendum took into account of a series of factors: the application of supervisory judgment, international provisions on provisions and cancellation requirements, the timing of NPL resolution procedures in the EU, including with regard to the related progress made in the recent past. The ECB Banking Supervision believes that the proposed calibration represents a balanced methodology to promote timely provisioning practices on NPLs in the future.

The need for a joint effort by all stakeholders to free European banks from the problem of impaired loans is widely recognized. In this context, the ECB Banking Supervision is facing the question in close cooperation with other stakeholders at European level.

The addendum is not currently applicable to the collateral exceptions. However, the ECB Banking Supervision holds below careful observation of developments related to this theme. Supervisory measures will be adopted in cases where banks reduce the levels of NPL by resorting only to the enforcement and in the absence of the possibility of divesting the related assets. In this context, the guidelines on NPLs invite banks to apply reasonable haircuts in the valuation of these assets.

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