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Introductory remarks to the public hearing on the draft addendum to the ECB guidance to banks on non-performing loans

Speech by Danièle Nouy, Chair of the Supervisory Board of the ECB, and Sharon Donnery, Chair of the ECB’s High Level Group on NPLs, Frankfurt am Main, 30 November 2017

Danièle Nouy, Chair of the ECB’s Supervisory Board

I welcome you to today’s public hearing here at the ECB in Frankfurt. This event is part of a public consultation on the draft addendum to our guidance to banks on non-performing loans.

As expected, there is a lot of interest in this hearing. Non-performing loans, NPLs for short, have become one of the most widely discussed issues in the European banking sector. That is no surprise, considering the sheer volume of NPLs, which reached around €1 trillion at its peak.

As a banking supervisor, I welcome the fact that NPLs receive so much attention. After all, they do pose a major problem.

  • First of all, they weigh on the balance sheets of banks, curbing their profits. That is a problem as European banks suffer from a lack of profitability anyway.
  • Second, NPLs are distracting and represent a drain on resources. For instance, they absorb the time and energy of bank staff and management, who could be employed more usefully on tasks such as adapting their banks’ business models to the fast-changing environment.
  • Third, NPLs undermine trust in a bank. How much trust would markets and investors have in a bank that is weighed down by high stocks of NPLs?

In short, high levels of NPLs weaken a bank and keep it from doing its job. And that job is, broadly speaking, to finance the economy. As the President of the ECB, Mario Draghi, stated at the ECB Forum on Banking Supervision on 7 November: “Internal ECB analysis shows that, over recent years, banks with high stocks of NPLs have consistently lent less than banks with better credit quality, therefore providing less support to firms and households”. So at the end of the day, NPLs are not just a problem for the affected banks; they are a problem for the entire economy.

The good news is that some progress has already been made. Since 2015, the ratio of non-performing loans in the euro area has gone down from around 7.5% to around 5.5%. In absolute terms, this is a decrease of around €200 billion. However, that is just an average. There are parts of the banking sector where NPL stocks are still far too high.

This issue needs to be resolved. That has been one of our supervisory priorities right from the start. Our comprehensive assessment back in 2014 helped us to gauge the size of the problem. In 2015, we set up a high-level working group whose job it was to devise a joint supervisory approach. And all the colleagues involved have done a great job. I thank them for it. They have developed an approach which is genuinely European; it aims to ensure a level playing field across the euro area.

In March this year, we published our qualitative guidance to banks on non-performing loans. It sets out the ways in which banks are encouraged to deal with non-performing loans. It should help them to draw up plans which are ambitious yet realistic, and which are backed by adequate governance structures.

Using this guidance as a reference, our Joint Supervisory Teams have assessed the banks’ plans. In short, we expect banks to deploy a diversified set of tools, such as cures, sales and write-offs, to reduce their NPLs. We expect them to reduce their NPLs steadily, year by year. And we expect the envisaged level of provisioning to be in line with the underlying strategy – for instance, with regard to sales of NPLs at current market prices.

Reducing the high stocks of NPLs is the first step. Banks must also ensure that the problem does not recur. And this forward-looking approach is supported by our draft addendum to the guidance.

The draft addendum clarifies our supervisory expectations in respect of the provisioning of loans that become non-performing in the future. So, to be very clear: we are not talking about existing NPLs here; we are not talking about the stocks.

The main purpose of the draft addendum is to make our approach transparent. And I would like to mention something which has sometimes been misunderstood: our expectations are firm, but there are no automatic actions attached to them. We will discuss provisioning with each affected bank: and we will duly consider the clarifications as well as the specific circumstances of the bank. If we are content with the clarifications, then no further action will be proposed. However, if we are not convinced and believe that a bank’s provisions do not adequately cover the credit risk, we may consider supervisory, prudential measures under the Pillar 2 framework.

The ECB plays an important role in resolving NPLs. And in doing so, we take an intrusive approach, but also a fair one. This consultation demonstrates that we are interested in listening to all stakeholders before we take action. However, we are not the only ones who can and should take action. What we need is a joint effort which also involves the banks, regulators and national governments, and EU institutions.

How easily NPLs can be resolved also depends on the national legal and judicial systems. And here, we see many differences between euro area countries. The time required to resolve NPLs in court, for instance, varies considerably. And in some countries, there are no specialised courts or judges to deal with insolvencies. In addition, faster out-of-court settlements are not available as a tool in every country. All these issues slow down the resolution of NPLs, and they could all be addressed by national governments.

Given that we live in a banking union, we should aim for a system which makes it just as easy to resolve an NPL in one country of the euro area as in any other.

Thank you for your attention.


Sharon Donnery, Chair of the ECB’s High Level Group on NPLs

Thank you, Danièle.

Direct engagement with the public, through the consultation, or via the public hearing today, allows us to listen and benefit from your insights, and it helps to promote trust.

We welcome the comments from the European Parliament, the Commission and the ample feedback we have received from relevant stakeholders to date.

Some, I believe, have viewed the draft addendum in isolation. However, what we are consulting upon today is a non-binding draft addendum to the qualitative guidance we published on 20 March.

It is worth recalling that the qualitative guidance I refer to requires banks to, amongst other things, establish bank-specific strategies which lay out their individual approach and objectives to NPL management.

In this context significant Institutions need to take into account the bank-specific operating environment, bank-specific internal NPL capabilities, and embedding their bank-specific strategy into management processes.

Without an appropriate governance structure and operational set-up, banks will not be able to address their NPL issues in an efficient and sustainable way. This matters regardless of whether we are talking about stocks of NPLs or new NPLs as they emerge.

Banks have the responsibility to ensure they have adequate internal control mechanisms to promote sound and effective risk management. This means dealing with their stocks of NPLs in a deliberate and determined manner, and ensuring they are prepared for any build-up of NPLs in the future – the issue which we are here to discuss today.

The ECB, for its part in this context – as an intrusive supervisor – has the responsibility to ensure banks have effective provisioning methodologies and processes, which should ensure that NPL-related risks are adequately covered, and it has the responsibility to set clear expectations to that effect.

The addendum therefore reinforces the qualitative guidance and is the context in which it should be seen.


More specifically, the addendum sets out, in a clear and transparent way, our supervisory expectations for prudential provisioning of new NPLs.

The draft addendum outlines that fully unsecured NPLs will generally be expected to be fully provisioned after two years of vintage.

Full prudential provisioning should generally be expected after seven years for fully secured exposures.

We have calibrated our expectations taking into account international best practice, the results of our stocktake of national practices with regard to legal, judicial and extrajudicial elements, and supervisory judgement.

This is part of normal supervision.


It is important to note that the draft addendum is not in itself a Pillar 2 measure but, following supervisory dialogue taking into account bank specific circumstances, its implementation may result in individual Pillar 2 measures for certain banks. The draft addendum provides an indication of what the ECB expects from the banks when we conduct the assessment of the risks they are exposed to.

The accounting position of a bank serves as a starting point for the supervisory dialogue in determining whether the bank has adequately covered, from a prudential perspective, its credit risk exposures.

These and other CET1 adjustments are then compared with the supervisory expectations in the draft addendum.

Banks are expected to discuss their approach to provisioning and collateral with respect to our supervisory expectations.

The ECB will give due consideration to a bank's position compared with our expectations, and in view of the specific circumstances of the bank. If, through this process, the ECB still considers that bank's provisions do not adequately cover the credit risk, a supervisory measure under the Pillar 2 framework may be considered. However, if the ECB is satisfied with the explanations, no further action is proposed.

At the risk of oversimplification, it can therefore be viewed as a three-stage process. First, as a transparent supervisor, we have set out in a clear and consistent fashion our supervisory expectations. Second, we will undertake our analysis of bank-specific circumstances, strategies, governance and operations, recognition, accounting position, banks’ comments in the supervisory dialogue, and so on, against these expectations. Third, this will be executed on a case-by-case basis, and our results will be incorporated into bank-specific SREP decisions.

Because working out NPLs requires concerted action by many stakeholders, it is important to note that we welcome the work being done in other fora, including the ECOFIN action plan.

As previously mentioned, our work will not stop here, and we will bring forward further proposals to deal with the stocks of NPLs in Q1 2018. However, today is about the draft addendum we have published, and we welcome your questions on this item.

Thank you.


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