Generally, we support the idea that the guidelines are applicable to all banks active in the European Union. This solution allows to maintain the level play field in the banking sector in EU. However, we would also like to add that the principle of proportionality as one of the basic principles in the European Unions should be clearly expressed in the guidelines and applied properly. This matter was not expressed sufficiently in the background to the proposed guidelines. In our strong opinion the scale of new mandatory requirements for banks should be adjusted accordingly for smaller banks in comparison to bigger banks which are important to the stability of the banking system, in order to limit the regulatory burden.
This matter generates the biggest concern for us. In our opinion the proposed threshold may be questioned as the underlying economic argument is missing. There is no explanation why this proposed level is treated as the proper basic benchmark. In situation when regulatory regimes concerning the restructuring procedures and extrajudicial collateral enforcement procedures differ substantially between countries indicating one universal threshold for all banks in Europe seems to be inadequate. The unique argument presented in the guidelines concerning the average level of NPLs in European banks during the last two years has to be recognised as incorrect.
The background material enclosed to the proposed guidelines indicates that the average level of NPLs in 12 Member States is today above the proposed threshold. In our opinion a little higher level of NPLs in some national banking systems does not necessarily generate the risk of instability for the banking sector. In Poland NPL ratio remained slightly above the 5% threshold for many years and still the banking sector is perceived as safe and stable both by the local banking supervision, central bank, but also by international institutions, such as the IMF. There is strong rationale for more granular approach to the NPL threshold, which should be established on the national level taking account of the local specifies, among others the historical national average level of the NPL ratio in the sector. The proposed threshold for NPL ratio is an important determinant imposed by the bank supervisory authorities, which may have a significant impact on the business strategy of banks.
In Poland the banking sector is the main source of financing the economy. The introduction of one universal threshold, determined for all banks in EU can have negative impact on access of clients to the financial services, to credit. Application of the threshold shall cause changes regarding risk management in order to reduce the NPL levels below the 5% threshold. Expected changes in credit policies (tightening of the credit granting criteria, increased cost of credit) may affect the financing of the Polish economy, reducing access to credit for riskier clients, causing negative effects for the economy as a whole. At the same time it shall not necessarily improve much the current good condition of the Polish banking sector.
The single fixed threshold for acceptable NPL level can also have negative impact on the anty-cyclical economic policy in the EU. It is natural that the NPL level grows during the economic crisis or during the period of worse macroeconomic conditions. The proposed simplified approach regarding determination of the level of threshold can hence have some negative limitations for economy. It would be better to use as the benchmark the average level of NPL ratio in banks set up and to revise it periodically or to use the average level of NPL ratio in the whole economic cycle.
Further, the proposed threshold may put some banks with NPLs ratio slightly above 5% level at a disadvantage compared to other institutions. We are afraid that the reclassification of bank to the group with higher level of NPLs will have the negative consequences for the image of these banks. In consequence banks perceived as having higher level of NPLs may have bigger problem during potential process of recovery. If the threshold is to be implemented, it would be reasonable to analyze the rationale for establishing additional threshold level which can distinguish banks (for example with the NPL share above 5% and 10%). One threshold may cause the cliff effect for banks. In our opinion it can introduce the misunderstanding for many entities which will receive such information about the bank. We believe the stock of NPLs is an important indicator of financial situation of the bank, but the scale of quality changes in the portfolio is a more valuable information in managing the bank and for providing eventual the recovery procedures.
We are also concerned that this threshold cannot be applied correctly at portfolio of all credits in the banks. We recommend to analyze the rationale for implementation of diversified level of threshold for some credit categories, some credit subportfolios. The requirements and specificities of retail and non-retail/wholesale segments differ so much that a “one size fits all” approach seems to be not justified.
The proposal of guidelines includes the possibility to extend the scope of application of the new requirements, for example to banks with specific concentration of NPEs towards a geographic region. This approach is generally reasonable but it would be good to know what will be the supervisory approach towards the small local banks, where the geographic concentration of NPLs is natural. This matter should be carefully analyzed and the respective recommendation should be included in the guidelines.
We would like to express our opinion that is similar to our general remarks. We recommend to adopt the guidelines after implementation of the proposed directive on credit servicers, credit purchasers and the recovery of collateral in Member States. This approach will allow to make the solution more comparable for all banks active on European financial market.
The proposed implementation date by 1 January 2019 is unacceptable. Otherwise requirements defined in the guidelines would have to be adopted by banks at a short notice, during the current financial year (2018). Such a prompt implementation of the new requirements, in particular for banks with NPLs above 5% threshold, requires from each bank to prepare a thorough gap analysis and a detailed implementation plan in order to meet the requirements. It should be stressed that in case of the requirement to develop NPE strategy, which should be embedded into the bank’s risk management framework, and the corresponding operational plan it would require approval by the Management Board and most probably by the Supervisory Board of the credit institution. To enable adaptation of banks processes and technologies, we would like to request a transitional implementation period of reasonable length allowing banks to prepare for the compliance with the Guidelines.
Prompt implementation of Guidelines would be no surprise in the situation when there is the high risk of instability of the banking sector. In our opinion banks in Poland are not in such situation and new requirements defined in the Guidelines should be implemented in a reasonable period of time, that is not sooner than by 1 January 2020.
The proposed scope is broad enough and in our opinion it captures all relevant options.
We do not see any significant obstacles.
In our opinion, forbearance solutions are very context specific and one-size fits all viability criteria may lead to limited ability to extend forbearance measures. The proposed viability assessment can be difficult to implement in the case of corporate clients. Although there are standard procedures, given the peculiarities of each case, it is difficult to have an automatic viability assessment in place.
The Draft Guidelines make explicit reference to the definition of NPE as defined in Annex V of Commission Implementing Regulation (EU) 680/2014, the EBA Guidelines on the application of the definition of default and Commission Delegated Regulation (EU) 2018/171 on materiality threshold in relation to certain criteria used for the identification of default. We hope that this reference allows banks to apply the definition of non-performing in consistent way.
The proposed guidelines should take account of the proposed regulatory changes of European Commission regarding Regulation of the European Parliament and of the Council on amending Regulation No 575/2013 as regards minimum loss coverage for non-performing exposures once the proposal has been finalised.
We do not have any significant objection against this proposal.
In our opinion these requirements capture all relevant aspects. However, we recommend strongly to apply in this area the proportionality principle in order to diminish the scale of requirements for smaller, local banks.