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Banks Reject Proposal to Cut Exposure to NPLs to Maximum of 5%

21 June 2018

“Why 5%?”, was the Portuguese Banking Association’s (APB) reaction to a proposal by Merkel and Macron to limit the eurozone’s’ banks’ maximum level of exposure to NPLs, as reported by Reuters. No details about the plan have been revealed as of yet, and something concrete may come out at next week’s European summit. However, the APB is assuming that the proposal will be similar to that of the European Banking Authority (EBA) which also proposed the same 5% ceiling.

“As to the European Banking Authority’s proposal to set a 5% NPL ratio to distinguish between banks with high (5% or above) and low levels of non-productive assets, the APB, like the European Banking Federation, stated that there is no economic basis for the suggested figure,” the association said in a statement sent to media outlets.

The APB argues that “there are no studies that determine that such a level of exposure to NPLs would impact the banks’ financial stability and ability to finance the economy, the two major concerns that have led bank regulators to announce the initiatives. ” In Portugal, banks have reduced their exposure to bad debts, especially over the last 18 months, but they still have one of the highest ratios in Europe (13.3%), according to the latest data from the Bank of Portugal.

The work to reduce NPLs is ongoing but European leaders are looking to force the most affected countries to accelerate the process of eliminating the bad loans, which are a burden on the banking system and a risk to financial stability. However, the APB rejects the use of the NPL ratio as a differentiating factor: “it is an oversimplification to just look at the NPL ratio, without taking risk mitigation factors into account, including the levels of impairment coverage and the value of collateral, which is a particularly relevant factor in the case of Portuguese banks,” the association argued.

According to data from the same institution, at the end of 2017, there was an NPL coverage ratio of almost 50% in the Portuguese banking system. That same indicator was only 40% at the end of 2015, reflecting an effort by banks to create buffers against potential losses.

The APB’s main concern, however, is that these measures could lead to a deterioration in the banks’ capital and threaten the survival of countless companies. “Measures of this kind must be sensitive to the differences in the Member States’ individual banking systems, in particular regarding the legal, judicial and fiscal situation of each country, including whether there are secondary markets for NPLs and the specific situation of each banking institution,” the APB stated.

Portuguese banks, like banks in other member states that suffered from the financial crisis, have been meeting and sometimes even exceeding demanding NPL reduction programs that had been negotiated with the supervisory authorities.”

The APB warned that “imposing across-the-board benchmarks for every bank in the EU, and thus forcing an accelerated reduction of NPLs would lead to the need to sell such assets at prices below their real value, with the associated destruction of capital and the transfer of profits to foreign investors.” Also, “and not least, such an approach could have consequences for the sustainability of companies that are undergoing financial restructuring processes but are still economically viable,” the banking association warned.

Original Story: Observador – Edgar Caetano

Photo: Inácio Rosa / Lusa

Translation: Richard Turner