Last month, the European Commission proposed an ambitious and comprehensive package of measures to tackle non-performing loans (NPLs) in Europe, making the most out of the promising progress already made in reducing risks in the banking sector.

NPLs are loans where the borrower is unable to make the scheduled payments to cover interest or capital reimbursements. When the payments are more than 90 days past due, or the loan is assessed as unlikely to be repaid by the borrower, it is classified as an NPL.

With the new comprehensive measures, the EC is delivering on the Council’s Action Plan to address the high stock of non-performing loans (NPLs) and prevent their possible future accumulation. It also builds on ongoing efforts by Member States, supervisors, Credit Institutions and the EU: this has led to stocks of NPLs declining in recent years across banks and EU countries.

The new measures also aim to place the European banking sector on an even better foundation for future generations, with rock-solid banks that perform their indispensable role in financing the economy and supporting growth. The package complements work on the Capital Markets Union and is an essential step towards the completion of the Banking Union, one of the immediate priorities agreed by EU leaders to strengthen Europe’s Economic and Monetary Union. In addition, the Commission is also presenting its second progress report on the reduction of non-performing loans in Europe, showing that the decline of NPL stocks is continuing.

Encouraging the development of secondary markets where banks can sell their NPLs to credit servicers and investors. Facilitating debt recovery, as a complement to the insolvency and business restructuring proposal put forward in November 2016. Assisting Member States that so wish in the restructuring of banks, by providing non-binding guidance – a blueprint – for establishing Asset Management Companies (AMCs) or other measures dealing with NPLs.

In particular, the proposals include the following key foundations:

- Ensuring sufficient loss coverage by banks for future NPLs.
- A Regulation amending the Capital Requirements Regulation (CRR) introduces common minimum coverage levels for newly originated loans that become non-performing.
- Further developing secondary markets for NPLs.
- Enabling accelerated out-of-court enforcement of loans secured by collateral.
- Out-of-court collateral enforcement is strictly limited to loans granted to businesses and subject to safeguards. Consumer loans are excluded.

Under the proposals, banks and borrowers can agree in advance on an accelerated mechanism to recover the value from loans guaranteed with collateral. If a borrower defaults, the bank or other secured creditor is able to recover the collateral that underpins a loan in an expedited way, without going to court.

The proposal will foster the development of secondary markets for NPLs by harmonising requirements and creating a single market for credit servicing and the transfer of bank loans to third parties across the EU. The proposed Directive defines the activities of credit servicers, sets common standards for authorisation and supervision and imposes conduct rules across the EU. It means that operators respecting those rules can be active throughout the EU without separate national authorisation requirements. Purchasers of bank loans are required to notify authorities when acquiring a loan.

Background Banking Sector risks have been significantly reduced in the EU in recent years. Banks under the supervision of the ECB have raised €234 B in additional revenue since 2014 and have much better liquidity buffers. This is thanks to significant regulatory measures already adopted and to be further strengthened by the Bank Risk Reduction Package which the Commission proposed in November 2016. Although significant progress has been made, NPLs are one of the key remaining legacy risks in Europe’s banking system.

Addressing the high stock of NPLs and their possible future accumulation is essential to complete Banking Union. The financial crisis and subsequent recessions led more borrowers being unable to pay back their loans, as more companies and people faced continued payment difficulties, or even bankruptcy. This was particularly pronounced in Member States that faced long recessions, with banks in those countries building up significant debts gradually.