On 22 August 2019, the European Central Bank (ECB) issued a communication on supervisory expectations for non-performing exposures (NPEs).

The communication begins by stating that addressing non-performing loans (NPLs) has been one of the key priorities for ECB Banking Supervision since its inception. The overall objective of developing the supervisory approach to NPLs is to help banks resolve their NPLs and to push for a discontinuation of “wait and see” approaches observed in the past, as well as to provide transparency in respect of the ECB’s supervisory expectations regarding banks’ treatment of NPLs. This approach includes strategic elements focused on addressing legacy NPLs and aims to limit the build-up of new NPLs in the future.

The ECB considers it of the utmost importance that the level of NPLs is further reduced in a swift manner while economic conditions are still favourable. The ECB adds that a failure to do so before moving into the next downturn “would pose a real problem”.

After summarising related ECB policies and measures in general, the communication:

  • clarifies aspects relating to the European Banking Authority’s publication of NPE-related guidelines;
  • provides further details regarding the ECB’s supervisory expectations for provisioning of NPE stock;
  • clarifies the interaction between the ECB’s NPE coverage expectations under Pillar 2 and the Pillar 1 prudential NPE rules; and
  • summaries adjustments to the Pillar 2 approach in respect of supervisory expectations for prudential provisioning for new NPEs in scope of the Addendum to the ECB guidance to banks on NPLs.

ECB communications serve as a starting point for supervisory dialogue with banks, where the specificities of each bank is duly considered. Therefore banks that are supervised by the ECB should review the communication.