Council adopts reform of capital requirements for banks' non-performing loans - Hoofdinhoud
The Council today adopted a new framework for dealing with banks' bad loans.
The new rules set capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets. The aim of the reform is to ensure that banks set aside sufficient own resources when new loans become non-performing and to create appropriate incentives to avoid the accumulation of NPLs.
A bank loan is generally considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying the agreed instalments or interest or when it becomes unlikely that the borrower will reimburse it. When customers do not meet their agreed repayment arrangements, the bank must set aside more capital on the assumption that the loan will not be paid back. This increases the bank’s resilience to adverse shocks by facilitating private risk-sharing, while at the same time reducing the need for public intervention. In addition, addressing possible future NPLs is essential to strengthen the banking union. It preserves financial stability and encourages lending to create growth and jobs within the Union.
On the basis of a common definition of non-performing loans, the proposed new rules introduce a "prudential backstop", i.e. common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing. Different coverage requirements will apply depending on the classifications of the NPLs as "unsecured" or "secured" and whether the collateral is movable or immovable:
Minimum coverage level (in %)
After year
1
2
3
4
5
6
7
8
9
Secured by immovable collateral
0%
0%
25%
35%
55%
70%
80%
85%
100%
Secured by movable collateral
0%
0%
25%
35%
55%
80%
100%
Unsecured
0%
35%
100%
The regulation will enter into force on the day following its publication in the Official Journal.