The consultation sets a threshold for the NPE ratio – equal to 5% - in order to identify the institutions that are required to establish and apply a recovery strategy, for the non performing and forbearance exposures in their portfolio.
We stress here that, although 5% being, on average the value of NPL ratio measured in recent year in EBA risk dashboard data, there exists a high degree of dispersion of the indicator among different class of banks, as highlighted at page 86 of the present Guidelines.
Small and medium size institutions, in particular, would be the operators deemed to be mostly affected by the introduction of the threshold.
Given the increase in the fixed NPL management costs that the introduction of the Guidelines bears, the impact of the proposal would therefore not be evenly distributed among institutions, affecting the proportionality principle that is set in the European banking and financial regulatory framework.
In the case of the leasing industry, the impact would be particularly relevant, especially in the Italian market, where institutions are often medium or small size entities, whose business model and structure would be highly affected by the introduction of highly standardized risk management practices and complex processes for managing NPL’s.
This would emphasize the uneven distribution of the effect of the introduction of the Guidelines on different entities and different financial industries.
In our opinion, the threshold could be set at a level that does not unduly affects smaller institution, while at the same time efficiently addressing the task of tackling NPL also for these operators.
In addition, a specific treatment should be foreseen for NPL lease exposures. As demonstrated by recent studies conducted by the Leasing European Federation, Deloitte and the University of Cologne (i.e. “Leaseurope response to the European Commission consultation on the finalisation of Basel III”), losses within the leasing activity are low because the lessor is funding a physical asset crucial to the client’s core business activities. As the asset is a key working tool for the lessee, many defaulted leases regrade back to healthy situation with zero loss. Additionally, the lessor can then sell or re-lease the asset in order to decrease any losses on the default, resulting in low loss rates.
The recent law about leasing introduced in Italy (Art. 1, c.136-140 Law n.124; Italian O.J. 189 of 14.8.2017) states the rights of the lessor on the asset leased in case of default of the lessee.
These characteristics of the leasing contracts would justify the exclusion of the lease exposures from the calculation of the general NPL ratio threshold.
In Chapter 9 of the Guidelines, it is proposed that the valuations of immovable property the gross carrying amount of which is larger than Euro 300,000 should be conducted by specialized technicians (see page 56).
In the leasing industry, asset management, both during the life of the contract and at the end of it, has a relevant role. Best practices on management of either leased or repossessed asset, as well as their proper evaluation, are well established in every institution that either directly or by means of controlled specialized financial intermediaries runs leasing activity. These activities are carried on on a regular basis by leasing intermediaries employees, such that a high degree of specialization, as well as long established time series of asset value variation is already present in those institutions for proper evaluation of a relevant number of leased asset.
Those database are often significantly diversified, reflecting information coming from deep and competitive markets for leased assets (both first and second hand).
Given also past experience, and in line as well with the Italian Banking Association, we therefore agree that the limit of Euro 300,000 seems to be very conservative and results as being excessively penalizing in the cost/benefit ratio since it would increase fixed NPL management costs without modifying recovery capacity, especially for the leasing industry. A threshold of at least Euro 1M could constitute a more efficient balance, especially for the immovable collateral property.
We want to stress that EBA Guidelines consider the banking NPLs as unique, without any distinction between the different technical forms of financing. According to this approach, the collateral to bank exposures is always defined with respect to the traditional" type of collateral, whose enforcement requires specific judicial processes (e.g. foreclosure of capital goods, release of premises in the case of real estate, etc.) and processes for realizing the value of the asset subject to public procedures (e.g. judicial auctions). These processes for the realization of collateral are long and expensive and in most cases lead to realizable values that are significantly lower than market values, with a strong negative impact on the final loss.
On the opposite, leasing contracts, by virtue of direct ownership by the "collateral" institute, benefits from short time of disposal of property collateral as well as less costly recovery procedures of the financed assets. Moreover, once the leasing company has repossessed the collateral, it can sell it under normal market conditions without the need for judicial procedures, thus succeeding in obtaining a normally higher price and reducing the loss associated with the NPE’s recovery process.
In addition, with the entry into force of the new Italian leasing law, leasing companies cannot determine the value of the assets and the sale price in the event of a dispute, but must rely on the results of objective appraisals, shared with the customer. This adds robustness and reliability to the process of evaluation of property collateral and to the estimating cash flows from property collateral liquidation.
On the grounds of these considerations, we think that leasing transactions, both on movable and immovable assets, should be considered "secured". We also think that, for the same reasons, an ad hoc, higher threshold should be set for leasing exposures, so as to properly determine whether the institutions falls among the “high NPE” level ones.
This threshold should consider the higher reliability of the recovery process of collateral linked to leasing exposures.
For the same reasons, we moreover think that the requirements for valuation of movable collateral in the case of leasing collateral should differ from the one proposed for “traditional” collateral.
In order to keep the estimation cost down, it would for example be advisable to keep the technical valuations of such assets outside the collateral valuation rules. For example, the valuations of leased asset could be conducted by employees instead of third parties, with the application of indexed re-valuations, such as the asset deterioration tables. This could be done keeping in mind, as extensively exposed above, that leasing industry is characterized by the presence of a high degree of technical specialization as regards either managed or repossessed movable, as well as immovable, property collateral."