Response to consultation on Implementing Technical Standards on NPL transaction data templates
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Also, as one of the participants in a previous consultation session from the GBIC (German Banking Industry Committee) pointed out, there is highly noticed influence of third parties with interests other than those of the sellers and buyers, as direct NPL transaction participants, which altered the nature of the templates more towards supervisory and statistical purposes, as well as purposes of transaction platforms that have identified the data and its analysis and provision as a source of revenue, and advisors who want to sell their services around data validation.
Moreover, what has been noticed is that a lot of previously labeled “non-critical data” have been shifted with the latest draft to category of “Mandatory” data, either without any definition change or with slight changes in field definition (increase from 70+ to over 130 mandatory data).
Furthermore, the expected impact on the cost side for the sellers of NPL should be taken into consideration. Namely, there is generally a high correlation between high data quantity, potential for error and greater validation effort. This has been recognized by EBA in the part referring to Internal governance. This added pre-sale validation burden is to be endured by the banks. The ITS draft requires credit institutions to establish an internal process ensuring that the information being provided to the prospective buyers have been validated by staff independent from the staff involved in the sales process and is subject to an appropriate managerial approval. This leads to a due diligence that should be carried out by the bank before it is even known whether a sale will take place (when demand and prices are still unknown) and building additional costs for the banks for data gathering and validation, causing the total transaction cost to increase. In other words, overly extensive data requirements create more complexity, effort, and liability risks. This in particular can create significant obstacles for smaller banks and might prevent them from entering the market as they do not have sufficient NPLs in total numbers to amortize the additional cost for data validation.
We support the revision of the NPL transaction data templates aiming at simpler, more balanced and effective design in order to achieve a broader application and increase transparency in the NPL market. In line with that, the "mandatory" category should be much more stringent in scope and include only those data without which valuation on a loan-by-loan basis is simply not possible. It is advisable to concentrate on the core data necessary for trade.
Also, what must be clearly stated in the document is the usage of the template – in which cases it is mandatory, and in which it is optional. (e.g., mandatory only in case when credit institutions decide to organize the sales NPLs trough the platforms, that require all mandatory information to be provided. In case of NPLs sale as bilateral transaction, the seller and buyer may agree on the relevant information needed for due diligence and valuation of the NPL transaction.”).
Also, in the part regarding the application potential future supervisory activity should be amended “…competent authorities may, nevertheless, assess the availability of information and use of the template as part of their supervisory activities in the area of NPL management or credit risk management by the credit institutions, for cases when sale of NPL has been organized through the platforms.”
Some definitions still remain unclear or represent an information that is not legally or reliably retrievable from the counterparty.
Or, maybe there is space for creating rating agencies for NPL loans (likewise other assets) that would cooperate with banks to assess their instruments altogether with national enforceability specification and such an information with `several fields add-up` (Onbalance sum and its specification, collateral value and basic specs, arrears info, trigger for initiated court proceedings, last payment date and sum collected for last x months period or so, ...) would be a better option than trying to put different approaches/legislations/schemes into a standardized set of values for particular fields. Let the market decide what is really needed. If you asked NPL buyers, whether they would like to have more and structured information, they would answer in the affirmative, basically because of “just in case”. However, no buyer would invest to gather so much data that does not directly say anything about debtor´s collectability (so why burden the banks?).
• CORP – floors / caps – single trx vs portfolio
In our opinion NPL data templates with significant fewer data fields can be useful for portfolio sales, but not for single tickets in the (large) corporate segment or for commercial real estate financing. According to market standards for larger single exposures sometimes no specific data is necessary for trades at all, because brokers and investors already have proper information, quotes indicate market price levels, sometimes buyers are already in a creditor`s position and increase their exposure. For large corporates the data template would not be sufficient, because more data is needed to assess the financial situation of a borrower, eg: business plans, going concern forecast, independent expert business reviews, existing and future financial structure and creditors, existing and planned future shareholder structure, quality of management, etc.
Hence, the NPL data templates should not be mandatory for single ticket transactions at all (ie exposure of one group of connected clients) or at least there should be a cap defined and exclude single tickets with a nominal exposure exceeding a certain threshold, proposed € 3 Mio nominal value.
In general, we believe, that for portfolios the proposed data fields are too many and not practical for transactions. Some defined data are not available in the banking systems and have to be collected manually, increasing cost, time schedule and reducing data quality.
The proposed threshold of € 25.000.- should be increased to € 300.000.- , to separate between retail business including residential mortgage on the one hand and the more complex corporate business on the other hand.
1. Do the respondents agree that these draft ITS fits for the purpose of the underlying directive?
The new proposal on data templates is still considered too detailed, requiring information that are not deemed critical for purposes of loan valuations. Namely, we believe that in the proposed data templates, despite a significant decrease of the data fields compared to the last template revision from May 2021 the remaining number is still high and contains notedly more information than the current market standard. In other words, it is still seen as too elaborate and granular. Some of the fields even surpass the information that is relevant for portfolio valuations. The general impression is that despite the revision and reduction of the previously called “critical fields”, data specifications are still very much statistically driven (evident by the compliance of many data points with values already known from AnaCredit /collected there, that are of a more statistical nature but do not affect the valuation or processing of exposures).Also, as one of the participants in a previous consultation session from the GBIC (German Banking Industry Committee) pointed out, there is highly noticed influence of third parties with interests other than those of the sellers and buyers, as direct NPL transaction participants, which altered the nature of the templates more towards supervisory and statistical purposes, as well as purposes of transaction platforms that have identified the data and its analysis and provision as a source of revenue, and advisors who want to sell their services around data validation.
Moreover, what has been noticed is that a lot of previously labeled “non-critical data” have been shifted with the latest draft to category of “Mandatory” data, either without any definition change or with slight changes in field definition (increase from 70+ to over 130 mandatory data).
Furthermore, the expected impact on the cost side for the sellers of NPL should be taken into consideration. Namely, there is generally a high correlation between high data quantity, potential for error and greater validation effort. This has been recognized by EBA in the part referring to Internal governance. This added pre-sale validation burden is to be endured by the banks. The ITS draft requires credit institutions to establish an internal process ensuring that the information being provided to the prospective buyers have been validated by staff independent from the staff involved in the sales process and is subject to an appropriate managerial approval. This leads to a due diligence that should be carried out by the bank before it is even known whether a sale will take place (when demand and prices are still unknown) and building additional costs for the banks for data gathering and validation, causing the total transaction cost to increase. In other words, overly extensive data requirements create more complexity, effort, and liability risks. This in particular can create significant obstacles for smaller banks and might prevent them from entering the market as they do not have sufficient NPLs in total numbers to amortize the additional cost for data validation.
We support the revision of the NPL transaction data templates aiming at simpler, more balanced and effective design in order to achieve a broader application and increase transparency in the NPL market. In line with that, the "mandatory" category should be much more stringent in scope and include only those data without which valuation on a loan-by-loan basis is simply not possible. It is advisable to concentrate on the core data necessary for trade.
2. What are the respondents’ views on the content of Template 1? Please provide any specific comment you may have on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS) added for your feedback.
See specific comments on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS).3. What are the respondents’ views on the content of Template 3? Please provide any specific comment you may have on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS) added for your feedback.
See specific comments on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS).4. What are the respondents’ views on the content of Template 4? Please provide any specific comment you may have on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS) added for your feedback.
See specific comments on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS).5. What are the respondents’ views on the content of Template 5? Please provide any specific comment you may have on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS) added for your feedback?
See specific comments on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS).6. Do the respondents agree on the structure of Template 2 to represent the relationship across the templates? If not, do you have any other suggestion of structure?
No comment, it’s properly structured7. Do the respondents agree on the structure and the content of the data glossary? Please provide any specific comment you may have on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS) added for your feedback.
See specific comments on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS).8. What are the respondents’ views on the content of instructions?
Provided instructions are rather detailed, but the quantity of requested data and argumentation supporting this quantity are not seen as fully supported and substantiated. We believe there is significant room for a further decrease of data fields in ITS which will be more aligned with market standards and practice.Also, what must be clearly stated in the document is the usage of the template – in which cases it is mandatory, and in which it is optional. (e.g., mandatory only in case when credit institutions decide to organize the sales NPLs trough the platforms, that require all mandatory information to be provided. In case of NPLs sale as bilateral transaction, the seller and buyer may agree on the relevant information needed for due diligence and valuation of the NPL transaction.”).
Also, in the part regarding the application potential future supervisory activity should be amended “…competent authorities may, nevertheless, assess the availability of information and use of the template as part of their supervisory activities in the area of NPL management or credit risk management by the credit institutions, for cases when sale of NPL has been organized through the platforms.”
9. Do the respondents agree on the use of the ‘No data options’ as set out in the instructions?
In general, we see the “No data options” as improvement to the previous consultation paper, however there is a noticed significant impediment that needs to be taken into consideration referring to extension of applicability of all “No data option” (ND 1 – ND 4) to mandatory data. Namely, investors may accept loans with incomplete data possibly at a lower price. Sometimes, the cost of collecting all mandatory fields is not justified by the potential expected price increase. We consider it particularly important that mandatory fields do not create an invincible obstacle for banks where some data is not available. In line with that, EBA must clarify what are the consequences (if any) for the bank as a seller in situations when it is not able to provide all mandatory fields.10. What are respondents’ views on whether the proposed set of templates, data glossary and instructions are enough to achieve the data standardisation in the NPL transactions on secondary markets, or there may be a need for some further technical specifications or tools to support digital processing or efficient processing or use of technology (e.g., by means of the EBA Data Point Model or XBRL taxonomy)?
Concerning proposed set of templates, data glossary and instructions these are not clearly defining how to `interpret` local legislation and product specifics into required structured data/fields. For example, there are several insolvency proceeding types across the EU; then e.g. concerning rules and enforcement schemes applicable under local laws, this is yet far from being harmonized even from a procedural point of view (how proceedings are initiated, what does that entail, etc.). Nor the products/instruments themselves are being standardized to give an equal information having some value in a particular field entered. Therefore, to standardise NPL transactions on secondary markets could be homogenous in terms of the product/enforcement view only at national levels. To achieve comparability, representability and standardization, there is more to elaborate in the field of product standardization and harmonization of enforcement law and procedures across impacted countries/entities.Some definitions still remain unclear or represent an information that is not legally or reliably retrievable from the counterparty.
Or, maybe there is space for creating rating agencies for NPL loans (likewise other assets) that would cooperate with banks to assess their instruments altogether with national enforceability specification and such an information with `several fields add-up` (Onbalance sum and its specification, collateral value and basic specs, arrears info, trigger for initiated court proceedings, last payment date and sum collected for last x months period or so, ...) would be a better option than trying to put different approaches/legislations/schemes into a standardized set of values for particular fields. Let the market decide what is really needed. If you asked NPL buyers, whether they would like to have more and structured information, they would answer in the affirmative, basically because of “just in case”. However, no buyer would invest to gather so much data that does not directly say anything about debtor´s collectability (so why burden the banks?).
11. What are the respondents' views on the approach to the proportionality, including differentiating mandatory data fields around the threshold? Please provide any specific comment you may have on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS) added for your feedback.
See specific comments on the data fields in the dedicated columns of the data glossary (Annex II to the draft ITS).12. Do the respondents agree with the proposed calibration of 25 000 euros threshold in line with AnaCredit Regulation? If not, what alternative threshold should be introduced, and why?
We propose to apply a client (private individuals and legal entities) view and a product view (unsecured and secured) instead of having one absolute amount threshold. As a result, it is proposed to provide 23 fileds in case of unsecured loans granted to Private individuals and additional 10 fields in case of secured loans (highlighted as “Agreed” in the NPL template).• CORP – floors / caps – single trx vs portfolio
In our opinion NPL data templates with significant fewer data fields can be useful for portfolio sales, but not for single tickets in the (large) corporate segment or for commercial real estate financing. According to market standards for larger single exposures sometimes no specific data is necessary for trades at all, because brokers and investors already have proper information, quotes indicate market price levels, sometimes buyers are already in a creditor`s position and increase their exposure. For large corporates the data template would not be sufficient, because more data is needed to assess the financial situation of a borrower, eg: business plans, going concern forecast, independent expert business reviews, existing and future financial structure and creditors, existing and planned future shareholder structure, quality of management, etc.
Hence, the NPL data templates should not be mandatory for single ticket transactions at all (ie exposure of one group of connected clients) or at least there should be a cap defined and exclude single tickets with a nominal exposure exceeding a certain threshold, proposed € 3 Mio nominal value.
In general, we believe, that for portfolios the proposed data fields are too many and not practical for transactions. Some defined data are not available in the banking systems and have to be collected manually, increasing cost, time schedule and reducing data quality.
The proposed threshold of € 25.000.- should be increased to € 300.000.- , to separate between retail business including residential mortgage on the one hand and the more complex corporate business on the other hand.