The European Banking Authority (EBA) launched in March 2018 a consultation on its Guidelines for credit institutions on how to effectively manage non-performing exposures (NPEs) and forborne exposures (FBEs).
The Guidelines target high NPE banks with the aim of achieving a sustainable reduction of NPEs to strengthen the resilience of their balance sheets and support lending into the real economy. The Guidelines are designed to ensure that consumers, who have taken out loans, are treated fairly at every stage of the loan life cycle. The consultation runs until 8 June 2018.
The Guidelines specify sound risk management practices for credit institutions for managing NPE and FBE, looking at the governance and operations of a NPE workout framework, the internal control framework and NPE monitoring, as well as early warning processes.
The Consultation paper asks for views on the threshold for assessing high NPE banks noting that credit institutions with elevated levels of NPEs, measured as a NPL ratio of 5% or above, should establish a NPE strategy and related governance and operational arrangements. Effective governance covers all responsibilities that banks have, including treating customers fairly.
The Consultation Paper also sets out requirements on processes to recognise NPEs and FBEs, as well as a forbearance granting process with a focus on the viability of forbearance measures. On the latter, the Consultation paper suggests that forbearance measures should be granted only when they aim to restore sustainable repayment by the borrower and are thus in the borrower’s interest. Credit institutions are expected to monitor efficiency and effectiveness of forbearance measures and have in place policies and processes to assess borrowers’ financial difficulties and identification of NPEs.
Finally, the Consultation Paper sets out requirements for competent authorities’ assessment of credit institutions’ NPE management activity as part of the Supervisory Review and Evaluation Process (SREP).