Response to consultation on Guidelines on management of non-performing and forborne exposures
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In case of many banks both EBA Guidelines and ECB Guidance will be applicable. This will both cause many technical difficulties and increase the implementation costs if they are not harmonized to the greatest possible extent.
Depending on the threshold level, some banks might be classified as high level banks by the EBA, but not by the ECB.
We would also like to point out, that continuously changing the thresholds makes it for banks very difficult to manage their NPL strategies. Any steering of NPLs will become difficult, as the banks will not know when to apply which guidelines and lose their targets.
Which cut-off date will be used for classifying the banks as high NPLs? This can have a significant impact on a number of affected banks as many banks strongly decreased their level of NPLs (already driven by ECB requirements) recently, but they might still be classified as high NPL banks by EBA.
As the EBA and ECB measures differ, it is also important that they are all clearly specified. Last but not least it is very important to clarify the proper approach in case of contradictions between ECB and EBA requirements.
Secondly, the implementation of a second line of defence controls is also not feasible. This would unnecessarily slow down the workout process and result in additional costs. If a bank has a fully-fledged approval process in place including 4 eyes principle and third parties participance for large exposures, then a second line of defence controls is not necessary.
Question 1: What are the respondents’ views on the scope of application of the guidelines?
The scope of EBA draft Guidelines and ECB’s Guidance for banks on non-performing loans will depend mainly on the jurisdiction and size of the bank (Eurozone/EU; significant/not significant).In case of many banks both EBA Guidelines and ECB Guidance will be applicable. This will both cause many technical difficulties and increase the implementation costs if they are not harmonized to the greatest possible extent.
Question 2: What are the respondents view of the proposed threshold of 5 % NPL ratio?
We do not understand the reasons for lowering the threshold to 5%. Having different requirements from ECB (threshold of 8%) will potentially lead to practical difficulties.Depending on the threshold level, some banks might be classified as high level banks by the EBA, but not by the ECB.
We would also like to point out, that continuously changing the thresholds makes it for banks very difficult to manage their NPL strategies. Any steering of NPLs will become difficult, as the banks will not know when to apply which guidelines and lose their targets.
Question 3: Do you see any significant obstacles to the implementation date and if so, what are they?
There could be obstacles related to uncertainty with regards to the cut-off date, i.e. point of time for applying the threshold to define, which banks are falling into the high NPL bucket.Which cut-off date will be used for classifying the banks as high NPLs? This can have a significant impact on a number of affected banks as many banks strongly decreased their level of NPLs (already driven by ECB requirements) recently, but they might still be classified as high NPL banks by EBA.
As the EBA and ECB measures differ, it is also important that they are all clearly specified. Last but not least it is very important to clarify the proper approach in case of contradictions between ECB and EBA requirements.
Question 4: Does section 4.3.2 capture all relevant options available for credit institutions to implement their NPE strategy?
We notice strong similarities with the ECB guidance which we already implemented.Question 5: Do you see any significant obstacles to the operationalisation of the NPE strategy as described in chapter 5?
Firstly, we would like to point out that a sectorial specialization is not feasible in some cases- especially if the critical mass of non-performing exposures is not reached. Also, it does not make sense to overload individual workout-managers. In this regard it is also important to note that the closer the loan gets to bankruptcy proceeding, the more detailed legal knowledge is necessary.Secondly, the implementation of a second line of defence controls is also not feasible. This would unnecessarily slow down the workout process and result in additional costs. If a bank has a fully-fledged approval process in place including 4 eyes principle and third parties participance for large exposures, then a second line of defence controls is not necessary.