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NPL, the ECB dictates strict rules to banks: “There’s much more to do”

4 October 2017 Il Sole 24 Ore

The ECB doesn’t loosen its grip on bad loans. In fact, it has just published an appendix with the guidelines on how to manage NPLs which sees automatic devaluations of bad loans accrued starting from 2018. In the meanwhile, the Central Bank has stated that it will communicate additional “considerations” on the matter by the first semester of next year, which will most likely raise the bar even further. “The high amount of NPLs doesn’t permit the banks to issue new loans”, explained Sharon Donnery, responsible from the NPL taskforce of ECB : “Quality of debt is essential and we hope to spread a culture of provision among banks, in order to avoid in the future the accumulation of bad loans like the one that nowadays burdens the European banks”.

Basically, the document reduces the autonomy of banks on the matter of bad loans management and starting from January 2018 devaluations will be automatic: after seven years, an impaired secured credit will be written off despite the guarantees. Whereas for the unsecured credits, if reported on the books as NPL for two years, they will be completely cancelled. This procedure will apply only “to impaired credits (bad loans or old substandard loans) which will mature in 2018”, specified the representative of the ECB taskforce. However, the measure will impose a review of the policies concerning provisions already on the short period since the coverage must be immediately applied in order to comply 100% with the 2 or 7 years condition.

We must note that the ECB document, even though not binding, will impose the banks to justify their lack of compliance. Finally, important news also for the investors: “a public communication regarding the coverage of bad loans according to the year of maturity is an important instrument to make the profiles at risk accountable towards the market”, says the ECB. Another suggestion likely to be mandatorily applied.


Source: Il Sole 24 Ore (by Marco Ferrando)

Translator: Cristina Ambrosi

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