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(BRUSSELS) – The EU presidency and Euro-Parliament agreed a new framework for dealing with banks’ bad loans Tuesday, including capital requirements for banks with non-performing loans on their balance sheets.
The institutions reached 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.
“The EU made important progress in recent years to make banks’ balance sheets more sustainable and to reduce stocks of existing non-performing loans. However, a comprehensive framework to prevent their accumulation in the future was missing so far,” said Austria’s economics minister Hartwig Loeger, for the EU presidency: “That’s what we are delivering today thanks to the agreement reached with the European Parliament.”
The proposal, initially put forward by the Commission in March 2018, aims at creating a prudential framework for banks to deal with new NPLs and thus to reduce the risk of their accumulation in the future. In particular, it provides for requirements to set aside sufficient own resources when new loans become non-performing and creates appropriate incentives to address NPLs at an early stage.
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 agreement will now be submitted for endorsement by EU ambassadors. Parliament and Council will then be called on to adopt the proposed regulation at first reading.
Action Plan on the Reduction of Non-Performing Loans in Europe - background guide
