On 31 October 2018, the European Banking Authority (EBA) published final guidelines on management of non-performing and forborne exposures. The guidelines are intended to ensure that EU credit institutions have adequate prudential tools and frameworks in place to manage effectively their non-performing exposures (NPEs) and to achieve a sustainable reduction on their balance sheets.
The guidelines outline the approach to the key elements of governance and operations in relation to an NPE workout framework, covering aspects related to steering and decision-making, the NPE operating model, the internal control framework and NPE monitoring processes. EU credit institutions with gross non-performing loan (NPL) ratios at a level of 5% or above should establish an NPE strategy, as part of their overall strategy, and related governance and operational arrangements.
The guidelines stress that any forbearance measures should be granted only when they aim to restore sustainable repayment by the borrower and are thus in the borrower’s interest. The guidelines set out requirements relating to processes for recognising NPEs and forborne exposures, as well as a forbearance-granting process with a focus on the viability of forbearance measures. EU credit institutions are expected to monitor the efficiency and effectiveness of forbearance measures and have in place policies and processes to assess borrower’s financial difficulties and identify NPEs.
The guidelines also provide guidance on the estimation of future cash flow resulting from an active workout of the exposure and/or the sale of collateral, and require EU credit institutions to have in place policies for timely impairments and write-offs. The management of NPEs secured by movable or immovable property collateral requires EU credit institutions to have in place governance arrangements, procedures, including on methodology and frequency, and controls on the valuation of the collateral.
Finally, the guidelines also set out requirements for EU competent authorities’ assessments of EU credit institutions’ NPE management activities.
The guidelines will be translated into the official EU languages and published on the EBA website. The deadline for EU competent authorities to report whether they comply with the guidelines will be two months after the publication of the translations. The guidelines will apply from 30 June 2019.