The European Banking Authority (EBA) has issued a consultation on its draft guidelines for credit institutions on how to effectively manage non-performing exposures (NPEs) and forborne exposures (FBEs).

The guidelines are designed primarily to reduce NPEs on banks’ balance sheets by providing supervisory guidance to ensure that credit institutions effectively manage NPEs and FBEs in their balance sheets. The guidelines are written from a prudential perspective, but are also mindful of the need to ensure that consumers, who have taken out loans, are treated fairly at every stage of the loan life cycle. To that end, the guidelines draw attention specifically to provisions under the EU Directives and relevant EBA guidelines relating to consumers, that credit institutions need to be cognisant of when managing NPEs.

The development and operationalisation of an NPE strategy is the core building block of the guidelines for banks’ NPE management. The guidelines outline the key elements of the governance and operations of a NPE operating model, internal control framework and NPE monitoring as well as early warning processes. Forbearance measures should be granted only when they aim to restore sustainable repayment by the borrower and are thus in the borrowers’ interests. The guidelines set 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.

The guidelines also provide guidance on the estimation of future cash-flows resulting from an active work-out of the exposure and/or the sale of collateral, and require credit institutions to have policies for timely impairments and write-offs. The EBA states that the management of NPEs secured by movable or immovable property collateral require credit institutions to have governance, procedures, including methodology and frequency, and controls for the valuation of the collateral.

The deadline for comments on the consultation is 8 June 2018. A public hearing will take place at the EBA’s premises on 25 April 2018 from 11:00 to 12:30 UK time. The guidelines should be implemented by 1 January 2019.

View The EBA launches consultation on how to manage non-performing exposures, 8 March 2018