The European Commission (EC) has proposed a package of measures to tackle non-performing loans (NPLs) in the European banking sector and prevent possible build-up in future.

As of September 2017, just under 4.5 per cent of all loans and advances in the EU were considered non-performing, meaning that scheduled repayments on the loan had not been made for more than 90 days or the loan has been assessed by the borrower as unlikely to be repaid. In 2015, the levels of NPLs in the EU were just under 7 per cent, showing a significant decrease of more than 2.5 percentage points. Italy, the country of greatest concern to the ECB for its high levels of NPLs, cut its outstanding stock of bad loans by a quarter between Q3 2016 and Q3 2017, when its ratio was 12.1 per cent.

While progress has been made, the EC intends to reduce the ratio of NPLs in European banks further still and prevent them from accumulating again in future. It is targeting the following four key areas:

• ensure that banks set aside funds to cover the risk of NPLs in future;
• encourage a secondary market for NPLs;
• facilitate debt recovery;
• provide guidance for EU nations to restructure banks if needed.

“With fewer NPLs on their balance sheets, banks will be able to lend more to households and businesses. Our proposals build on the significant risk reduction already achieved in recent years, and must be an integral part of completing the Banking Union through risk reduction and risk sharing,” said Valdis Dombrovskis, Vice-President for Financial Stability, Financial Services and Capital Markets Union.

These were the key elements of the proposals:

1. Banks to earmark capital for NPLs

• A Regulation amending the Capital Requirements Regulation (CRR) introduces common minimum coverage levels for newly originated loans that become non-performing. In case a bank does not meet the applicable minimum level, deductions from banks' own funds would apply.
• The measure addresses the risk of not having enough funds to cover losses on future NPLs and prevents their accumulation.

2. Facilitate debt recovery

• Under the proposals, banks and borrowers can agree in advance on an accelerated mechanism to recover the value from loans guaranteed with collateral.
• If a borrower defaults, the bank or other secured creditor is able to recover the collateral that underpins a loan in an expedited way, without going to court.
• Out-of-court collateral enforcement is strictly limited to loans granted to businesses and subject to safeguards. Consumer loans are excluded.

3. Secondary markets for NPLs

• The proposal will foster the development of secondary markets for NPLs by harmonising requirements and creating a single market for credit servicing and the transfer of bank loans to third parties across the EU.
• The proposed Directive defines the activities of credit servicers, sets common standards for authorisation and supervision and imposes conduct rules across the EU. It means that operators respecting those rules can be active throughout the EU without separate national authorisation requirements.
• Purchasers of bank loans are required to notify authorities when acquiring a loan. Third-country purchasers of consumer loans are required to use authorised EU credit servicers. Consumer protection is ensured by legal safeguards and transparency rules so that the transfer of a loan does not affect the legitimate rights and interest of the borrower.

4. Guidance on setting up national asset management companies (AMCs)

• The non-binding blueprint guides Member States on how they can set up national AMCs, should they find it useful, in full compliance with EU banking and State aid rules.
• While considering AMCs with a State aid element as an exceptional solution, the blueprint clarifies the permissible design of AMCs receiving public support. The blueprint also sets out alternative impaired asset measures.
• The blueprint suggests a number of common principles on the set-up, governance and operations of AMCs. The blueprint draws on experience and best practices from AMCs already set up in Member States.