ECB to Tighten Guidelines for New Bad Debts as of January

4 October 2017

As of January 1, 2018, the European Central Bank (ECB) will require that banks set up acceptable provisions for new unsecured loans two years after having been classified as problematic.

In an addendum to the Non-Performing Loans (NPL) guidelines – published today and up for public consultation until December 8 – the ECB informs that in the case of collateralised claims, the debt must be completely provisioned for with seven years after a classification as problematic.

The draft addendum specifies the supervisor’s quantitative expectations regarding the minimum levels of acceptable provisions applicable to new NPLs.

“Also, the institutions are expected to explain to supervisory authorities any deviations from the guidelines,” the ECB states, stressing that “from the explanations provided by credit institutions, the ECB will assess the need for additional supervisory measures.”

Regarding NPL stocks, the ECB’s Banking Supervision arm asked credit institutions with high levels of NPL to submit their NPL strategies in the first half of this year, including their NPL reduction targets, according to the statement.

The ECB believes that “many credit institutions have made remarkable progress and devised credible strategies, including reduction plans, but that” some credit institutions still need to make improvements.”

The ECB’s Banking Supervision department will continue to closely monitor progress in the reduction of NPLs, the provisioning of NPL stocks and the evolution of NPL strategies, the ECB said.

The ECB further states that, before the end of the first quarter of 2018, Banking Supervision will communicate its consideration of complementary policies to address the problem of current NPL stocks, including appropriate transitional arrangements.

The ECB, which oversees some 130 banks in the euro zone, wants to promote the timely provisioning and consolidation of exposures to doubtful loans.

As part of the public consultation on the draft addendum, the ECB will hold a public hearing on November 30, 2017, at its premises in Frankfurt, Germany.

Original Story: Diário de Notícias / Lusa

Translation: Richard Turner