European Banking Federation

In our view, appropriate and proportionate implementation that takes national specificities and starting situations into account can only be achieved if the Guidelines are addressed exclusively to the competent authorities (paragraph 16), without being directly binding on the institutions. Instead of being oriented on the detailed requirements for significant institutions (as the ECB Guidance), principle-based wording should be implemented in the Guidelines to achieve this goal. The instruments to be used would then be listed as more of a “toolbox” enabling individually proportionate application. Process requirements not taking into account the conditions of the bank (proportionality) would be too broad and would thus not be a suitable supervisory tool.
Credit institutions acting as investors on the secondary NPL market have no desire to reduce their NPL ratios. The secondary NPL market is an important tool for “traditional” banks to reduce their NPL ratios, hence having investors on this market should lie in EBA’s interest. Therefore, purchased NPL portfolios should be excluded from these guidelines as well as from the definition of the NPL ratio.
There is no reason for a bank to have a NPL management policy for assets in the trading book which qualify as NPL, because such assets have been purchased at arm’s length conditions. In addition, all trading book assets are already subject to the prudent valuation requirements of CRR Article 34 and are held only for a short period of time. Excluding trading book assets would also support liquidity in the market and allow other banks to offload their NPL portfolio. The definition used by the EBA Guidelines (Annex V of Commission Implementing Regulation 680/2014 - FINREP) refers only to trading assets in IFRS terms and not trading book assets in regulatory terms.

Since it was EBA’s intention to exclude assets in the trading book, it would be beneficial if the Guidelines would explicitly exclude all assets in the regulatory trading book (as per the definition of CRR (Capital Requirements Regulation 575/2013) Article 4(1) (86).) as well as all trading assets as per the IFRS definition.
Some clarifications on the interplay between ECB guidance and EBA’s guidance may be warranted. Will the EBA guidelines supersede the “Guidance to banks on non-performing loans” by ECB for its supervised institutions? In that regard, will institutions having a NPL ratio above the threshold be subject to these provisions even if not referenced by the ECB as a high NPL Bank? Also, it is not clear how the guidelines are to be applied at portfolio level which is also defined by the ECB as criteria for the implementation of specific NPL reduction plans.
Moreover, it should be clarified how the NCAs will apply the proportionality criteria mentioned in paragraph 15, in particular for the strategic and operational plans required for High NPL banks, given the implementation timing and costs associated: “The guidelines should be applied in a proportionate manner and, in particular, organizational aspects of management of NPEs and forborne exposures (FBEs) should be applied taking into account the size and complexity of the institutions.” (page 7).
In order to properly apply the proportionality principle, as it was set in the paragraph 17 GCRAECL – EBA referred to the application of the principles of proportionality, materiality and symmetry , and taking into consideration some small size local units that could be part of a group, not only the NPL Ratio should be considered but also the materiality of the portfolios within the group.

In case some of the high NPL specific requirements would apply to low NPL banks with individual high NPL portfolios, those should be clearly specified, as it would not be proportional to identify a bank as a high NPL bank due to high NPLs in an immaterial portfolio.
On a more general note, we understand the basis of the current proposal to have been the corresponding ECB’s Guidance, in which no NPL ratio threshold has been set (it only includes a general reference of “considerably higher NPL ratio”). In that sense, the establishment of thresholds of this nature, just like any other mandatory requirement (capital, liquidity, leverage), should be left to be defined under level 1 legislation.

We appreciate the rationale of distinguishing between high and low NPL banks, though as the ECB’s guidance evidences, setting a threshold is no prerequisite for setting a policy towards NPL reduction and mitigation. Also, additional clarity is needed on the application of such a threshold.

EBA does not identify the rationale for the choice of the threshold, only referring to it as the average value for the euro area. There is no economic basis justifying the 5% NPL ratio and how it relates to financial stability. The euro area average is itself a moving target - if the guidelines had been drafted two years ago, would this reference be different? It seems clear that the guidelines lack an economic justification and an impact analysis that supports the establishment of such reference. Being a structural trigger, with relevant implications for banks, it is very questionable why it is not supported by an adequate analysis process (e.g. at which level does the NPL ratio impact the capacity of the banks to finance the economy or endanger financial stability, the main two drivers of authorities’ focus on the NPE). Based on this, a certain range of NPL ratios as a threshold may be more adequate.

Further, any automatic system triggered classification like the 5% threshold standalone may be in some cases not adequate. Hence, the Guidance should recognize the need for an expert judgement where NPL reduction actions already made by the institutions must be a relevant driver. One further main trigger/indicator of course shall be the NPL ratio itself but by no means the only one. In our view, supervisory intensity is one main decision that supervisors have to make and to set an automatic threshold as the only input to trigger this decision does not seem as the best supervisory practice.

Focus should also be placed on the costs necessary to be able to apply the recovery strategies (included in the ICAAP, RAF and Recovery Plan) from as early as 2019 and finance the unplanned investments necessary in 2018 to ensure all the operational requirements set out in the chapter on Governance (particularly technical resources). EBF therefore asks for a gradual introduction of the operational requirements.


Specific comments to paragraphs #10, #11 and #20 (Background and rationale):

- ECB defines high NPL banks as banks with an NPL level that is considerably higher than the EU average level. In Dec.17, according to EBA’s Risk Dashboard, the average EU NPL ratio stood at 4% whereas a year ago it was 5% and two years ago it was 6%. By setting the threshold of a NPL ratio at 5% level, EBA seems to be misaligned with the ECB “considerably higher than the EU average level” concept and even with EBA’s own Risk Dashboard as in EBA’s Risk Indicators heat map the “RGB colour criteria” assigns the Red colour to NPLr > 8%.
- Defining a threshold as a ratio raises level playing field concerns for banks that had to make a deleveraging effort in the past few years (the reduction in the denominator diminishes the relevance of the numerator reduction).
- When defining a NPL minimum ratio it is also necessary to take into consideration other relevant risk metrics such as broad coverage ratios (provisions, impairment, collaterals, among other), something that naturally would have been taken into consideration under an expert-based regime.
- The setting of a minimum threshold as a prerequisite for transparency, as suggested in paragraph 20 (background and rationale), may be questioned in same instances. Instead, an argument supporting the proportionality principle, other risk metrics or organizational aspects of management of NPEs/ forborne exposures taken into account (beside a threshold), would better promote the level playing field, without compromising the ambition for transparency.
- A clarification on the threshold in the context of NPL vs. NPE is needed. A threshold of 5% has been defined for NPL, however, the trigger for management actions is to be applied for both loans and debt securities. Similarly, paragraph #10 refers to “exposures and portfolios with material levels of NPEs”. Is materiality to be assessed by the same threshold of the NPL ratio? Clarification is needed on what exposures are expected to be tackled: loans, debt securities, portfolios?
- In paragraph 11, further clarifications on the meaning of a “high share” or “material amounts” of NPE would be needed.
- Also related to paragraph 11, it would be relevant to properly identify the scope for calculating the NPLs threshold (i.e., consolidated, subsidiaries, EU-subsidiaries?).
- Under no circumstance, should the threshold be applied at customer group level and an NPL ratio should not be considered as an appropriate metric for a customer group due to default contagion rules.
The proposed implementation date (1-Jan-2019) is too strict from the perspective of e.g. forbearance classification and collateral related requirements. The implementation date may be challenging depending on IRB materiality assessments and possible involvement needed from competent authorities.
The “Guidelines on management of non-performing and forborne exposures” includes process oriented references and connections to other regulations and guidelines with implementation date 1st of January of 2021. In order to make it possible to synchronize the implementation of all new upcoming rules and routines, we recommend applying the implementation date 1st of January of 2021 for this guideline as well (please see also the answer to Question 7 below).
The mandatory chapters 6 to 9 in the guidelines increase the level of details of the requirements substantially, i.e. describing exactly how routines, processes and IT-systems should be set up. For institutions in the member states fulfilling the current requirements in NPE and FBE regulations, but not having exactly the mandatory detailed routines and processes in the Guidelines, e.g.to classify FBE in short-term/long-term, viable/non-viable etc., there will be significant work and large costs to update IT-systems with the new detailed requirements. For the institutions having NPL ratios far below the NPL threshold, it is unnecessary to put this pressure which results in much higher implementation costs compared with a normal implementation period.
A related issue is how actionable NPE reduction measures can be in situations where the unlikely to pay (UTP) share of the NPE is materially relevant. Some of the criteria for the UTP part may not be sustained from a contractual, legal or judicial execution point of view which may constitute an effective impediment to NPE reduction. For comparability purposes and effectiveness of NPE reduction strategies, the breakdown between “past due” and UTP needs to be taken into consideration.
The definition of the “management body” is unclear. It would be unreasonable to consider that it always implies the bank’s Management Body. The MB of an internationally-active bank is not the appropriate body to approve lower-level policy document, as such policies are better delegated, understood and monitored by lower policy committees that are closer to the details.

We suggest providing clarity about the expectations around the definition of “management body”, adopting a proportionate approach especially for internationally-active banks, whose Management Boards cannot meet daily and are occupied with international strategic decisions. Plans or other policy documents should be adopted by policy committees that are of sufficient calibre to understand the issues and also of appropriate seniority and scope so that they can monitor implementation and consider adjustments as necessary.
From a risk perspective, creating detailed mandatory guidelines on how to organise NPL management for all credit institutions in the EU and regulating in detail how they should set up NPL routines and processes could create systemic risk. Regulations should be based on what NPL requirements credit institutions should fulfil, not on the details on how to fulfil them. No evidence is shown that an organisation based on centralised work-out-units is the best organisation to manage high NPL volumes for all institutions in all EU countries, having different local market conditions (some with other currencies than EUR), different current organisations (centralised or decentralised), different business models (holding financial assets or selling financial assets), etc.
On the contrary, many other organisation types than centralised work-out-units have, during periods with high NPL volumes, proven to be more successful when adapted to the geographical and individual conditions. Best practice from a systemic risk perspective is reached if the credit institutions decide the best organisation, and competent authorities have the tools needed to evaluate and put pressure to ensure they actually have the best individual organisation to fulfil the regulatory requirements. An alternative regulatory choice could be to state in the guideline chapter 2 (Subject matter, scope and definitions) that the credit institution should decide the best organisation to manage NPL volumes, based on best practise and geographical conditions. If the credit institution, after an assessment made by the competent authority, fails to demonstrate an efficient organisation, the competent authority should have a mandate to demand necessary adjustments. If adjustments made by the credit institution still do not meet the requirements from the competent authority, the suggested organisation in the Guideline is to be implemented. This amendment would lead the Guidelines to enable a faster decrease in NPL volumes by adapting to geographical differences within the EU and individual institutions, without losing the goal to put pressure when and where it is needed.
In our opinion, forbearance solutions are very context specific (depending on the borrower’s individual circumstances, industry or economy wide circumstances) and one-size fits all viability criteria lead to limited ability and willingness to extend forbearance measures. For instance, the proposed viability assessment can be difficult to implement in the case of corporate clients. Given the peculiarities of each case, it is difficult to have an automatic viability assessment in place.
Some forbearance measures may be classified as non-viable but may be considered appropriate options for customers based on their circumstances. On this basis the viability construct may result in a reduction in the range of forbearance solutions available to customers.
Additionally, the requirement to demonstrate via written documentation the event that caused temporary constraints to the borrower is cumbersome to implement, particularly in the case of short-term forbearance measures. Alternatively, it should be specified as a best practice, to only be applied whenever possible. With respect to short term measures, not only “modification of the terms and conditions” but also “refinancing” should be included.
Moreover, according to chapter 6 on forbearance, before granting any forbearance measures, banks should assess borrower’s creditworthiness or in general the borrower’s ability to pay in the future (at the end of the forbearance measures). In some countries (e.g. Italy), laws issued by government or agreements signed with associations of consumers or enterprises, provided mandatory forbearance measures (e.g. the moratoria on payment of instalments) for banks in case of specific events regarding the borrower (e.g. loss of jobs, death, earthquake). In case of law, regulation or institutional agreement whereby forbearance measures are mandatory, banks should be exempted from the requirements of Chapter 6.
Finally, pending the final issuance of the “EBA Guideline on loan origination, monitoring and internal governance”, banks should be allowed to suspend the implementation on the affordability assessment criteria until the final guidelines are in force.
We would like to highlight that, although the NPE Guidelines make explicit reference to the EBA Guidelines on the application of the definition of default and Commission Delegated Regulation (EU) 2018/71 on materiality threshold in relation to certain criteria used for the identification of default (paragraph 149 (Past due criterion), paragraph 150 (Indications of unlikeliness to pay) and paragraph 166 (Consistent application of definition of non-performing), it does not require explicit alignment regarding other criteria that should be applied (paragraph 159 (Exit from non-performing status) and paragraphs 152 to 158 (Forbearance and performing status)).
There might also be a misalignment regarding the implementation date (taking into account that NPE Guidelines refers to EBA Guidelines on the application of the definition of default and Commission Delegated Regulation (EU) 2018/171 on materiality threshold):
o NPES (CP Draft Guidelines on management of non-performing and forborne exposures): These guidelines apply from [1 January 2019].
o Default (EBA Guidelines on the application of the definition of default and Commission Delegated Regulation (EU) 2018/171 on materiality threshold): These guidelines apply from 1 January 2021.
A competent authority shall set a date for the application of the materiality threshold which may vary for different categories of institutions but which shall be no later than 31 December 2020 for institutions using the Standardised Approach.
Additionally, entities need a reasonable period to adapt their internal procedures to the legal thresholds once the competent authority has decided them.
For that reason, the “Guidelines on management of non-performing and forborne exposures” should not be applied until the authorities publishes the legal thresholds plus an additional period of time (need to implement them internally) and they should not be applicable before 1st of January of 2021."
This issue should be answered solely from the accounting or financial reporting perspective, and no parallel world should be created by the supervisors. It is certainly true that accounting issues are fundamental for supervisory law. However, responsibility for them lies elsewhere (national lawmakers, university departments of accounting, the IASB, etc.)
We are thus particularly critical of the statements regarding risk provisioning. There is absolutely no need here for effectively establishing prudential rules on loss allowances (especially not if they are clearly weighted towards IFRSs, as they are in the EBA draft). Rather, the existing accounting rules apply (incl. nGAAP). In this respect, the risk management requirements should merely stipulate that exposures must be valued in a timely manner in the course of problem loan management and that a risk provision must be recognised or adjusted if necessary.
Ultimately, the indirect route via “prudential loss allowances” results in a requirement for IFRS rules for all banks, for which neither the ECB nor the EBA have a mandate.
Notwithstanding the above, more flexibility should be allowed. For example, in the case of non-EU subsidiaries, in some countries partial write-offs are common, while in others it is not the case or are subject to tax related impediments. To ensure harmonized treatment and implementation, the guidelines could include example calculation and illustrations with rules, cash flow calculations that generate positive cash flow to service the loan, documented collateral values and empirical evidence. It is important that EBA ensures a harmonized application of the rules across EU, which is consistent with IFRS9, CRR/CRD IV and the current SREP process as well as national consumer protection rules and others (i.e., European Commission Backstops, ECB NPL Addendum guidance).
Further, we would like to point to the industry practice of using current interest rates as the more appropriate basis for certain products. Moreover, we would agree with the request for cash-flows examples to be provided in particular for those that generate positive cash-flows.
We would agree with the alignment of accounting practices and the NPL addendum where it is outlined that the adjustment for write-off/provisioning backstops could be taken through capital as opposed to the provisioning process. IFRS9 does not allow for undue conservatism.
It is explicitly mentioned that Articles 208 and 229 of the CRR apply. However, all proposed requirements concerning valuation and monitoring/review of property values are clearly stricter than those in the CRR, so the application of Articles 208 and 229 is not possible.
The requirements in the draft guideline on annual valuations should be consistent with those of the CRR. We have serious reservations, in particular about the requirement for regular property-specific appraisals of collateral for NPEs of over 300,000 euros since it is inconsistent with the CRR. Annual monitoring, for instance on the basis of certain existing concepts (e.g. the prudential market fluctuation concept), already ensures a close analysis of the market for commercial and residential property. The value of collateral is also reviewed and, if necessary, adjusted if there is a specific reason to do so.
Furthermore, the introduction of a fixed de minimis threshold of 300,000 euros for a simplified valuation procedure would sometimes conflict with national market practices, placing an additional operational burden on banks despite the high-quality monitoring, review and revaluation processes already in place. We therefore oppose the introduction of a fixed de minimis threshold and would instead recommend aligning the valuation and monitoring/review requirements in the draft guidance with those in Articles 208 and 229 of the CRR.
Recognized automated valuation methods should be considered as eligible valuations and should be allowed to be used to update the valuation for non-performing loans regardless of the size of the exposure, subject to existence of a well-established market. Only where such conditions are not in place there could be a limitation, however, this should be increased to 1 Mio Euro.
It is important that regulators move in a direction that supports smarter and more automated valuation methods (AVM) in situations where the real estate markets are well established, especially residential real estate. The regulatory burden and costs increase considerably if banks are required to employ certified valuers when not needed in a well-established residential real estate market. The use of eligible AVM methods (not indexation) and registered data is increasing, creating more reliable data. It is important that AVM methods are put on the same footing as manual valuations (RRE) and considered as independent. The data are supposed to be back-tested by the AVM vendors and/or the bank in the same operation.
There are various valuation requirements presented in several standards, rules and guidelines among others from ECB, European valuation standard, BRRD, Mortgage Directive and more. EBA should state and support that long term competent experience in valuing properties in a bank, supported by an internal valuation education, should be considered as valid and professional valuation methods within banks. Alternatively, banks should be able to operate the independence requirement by deciding a structure of independence principles.
The collateral valuation principles should be clarified in relation to existing EBA Q&A responses in at least two areas. In paragraph 203 it is stipulated that the bank shall have in place policies for which types of immovable property individual property specific appraisals are required, and for which indexed valuation may be used. In CRR article 229 there is a Q&A related to the use of statistical methods for valuation, where it is stated that statistical methods be not used as sole means for valuation. The draft EBA guidelines may be interpreted as less strict than the CRR Q&A and we kindly ask for clarifications in this area.
Paragraph 215 sets out requirements for annual revaluation of collaterals for NPEs, however the paragraph refers to language in paragraph 203, which is a paragraph only applicable for immovable property collateral. Therefore, it is unclear whether the annual revaluation requirements are meant to apply only to immovable property collateral or also other types of collateral.
On the valuation of movable property collateral, we deem that it should be better clarified what the perimeter of movable property to be collateralized should be. In particular, we suggest EBA to provide a better definition of “movable property” and a clear indication of the reason behind it. For example, to us it is unclear whether we should consider registered movable properties and pledges on commodities/goods and/or not listed Financial Assets.
Finally, the EBA guidelines do not appear to provide for an explicit definition of movable property other than paragraph 193 “ for the purposes of the guidance set out in this chapter, all types of immoveable property and movable property includes collateral such as commercial real estate, residential real estate, land, shipping, vessels and offshore assets”. A more explicit definition of movable property would assist.
It is explicitly mentioned that Articles 208 and 229 of the CRR apply. However, all proposed requirements concerning valuation and monitoring/review of property values are clearly stricter than those in the CRR, so the application of Articles 208 and 229 is not possible.
The requirements in the draft guideline on annual valuations should be consistent with those of the CRR. We have serious reservations, in particular about the requirement for regular property-specific appraisals of collateral for NPEs of over 300,000 euros since it is inconsistent with the CRR. Annual monitoring, for instance on the basis of certain existing concepts (e.g. the prudential market fluctuation concept), already ensures a close analysis of the market for commercial and residential property. The value of collateral is also reviewed and, if necessary, adjusted if there is a specific reason to do so.
Furthermore, the introduction of a fixed de minimis threshold of 300,000 euros for a simplified valuation procedure would sometimes conflict with national market practices, placing an additional operational burden on banks despite the high-quality monitoring, review and revaluation processes already in place. We therefore oppose the introduction of a fixed de minimis threshold and would instead recommend aligning the valuation and monitoring/review requirements in the draft guidance with those in Articles 208 and 229 of the CRR.
Recognized automated valuation methods should be considered as eligible valuations and should be allowed to be used to update the valuation for non-performing loans regardless of the size of the exposure, subject to existence of a well-established market. Only where such conditions are not in place there could be a limitation, however, this should be increased to 1 Mio Euro.
It is important that regulators move in a direction that supports smarter and more automated valuation methods (AVM) in situations where the real estate markets are well established, especially residential real estate. The regulatory burden and costs increase considerably if banks are required to employ certified valuers when not needed in a well-established residential real estate market. The use of eligible AVM methods (not indexation) and registered data is increasing, creating more reliable data. It is important that AVM methods are put on the same footing as manual valuations (RRE) and considered as independent. The data are supposed to be back-tested by the AVM vendors and/or the bank in the same operation.
There are various valuation requirements presented in several standards, rules and guidelines among others from ECB, European valuation standard, BRRD, Mortgage Directive and more. EBA should state and support that long term competent experience in valuing properties in a bank, supported by an internal valuation education, should be considered as valid and professional valuation methods within banks. Alternatively, banks should be able to operate the independence requirement by deciding a structure of independence principles.
The collateral valuation principles should be clarified in relation to existing EBA Q&A responses in at least two areas. In paragraph 203 it is stipulated that the bank shall have in place policies for which types of immovable property individual property specific appraisals are required, and for which indexed valuation may be used. In CRR article 229 there is a Q&A related to the use of statistical methods for valuation, where it is stated that statistical methods be not used as sole means for valuation. The draft EBA guidelines may be interpreted as less strict than the CRR Q&A and we kindly ask for clarifications in this area.
Paragraph 215 sets out requirements for annual revaluation of collaterals for NPEs, however the paragraph refers to language in paragraph 203, which is a paragraph only applicable for immovable property collateral. Therefore, it is unclear whether the annual revaluation requirements are meant to apply only to immovable property collateral or also other types of collateral.
On the valuation of movable property collateral, we deem that it should be better clarified what the perimeter of movable property to be collateralized should be. In particular, we suggest EBA to provide a better definition of “movable property” and a clear indication of the reason behind it. For example, to us it is unclear whether we should consider registered movable properties and pledges on commodities/goods and/or not listed Financial Assets.
Finally, the EBA guidelines do not appear to provide for an explicit definition of movable property other than paragraph 193 “ for the purposes of the guidance set out in this chapter, all types of immoveable property and movable property includes collateral such as commercial real estate, residential real estate, land, shipping, vessels and offshore assets”. A more explicit definition of movable property would assist.
Christian Biesmans