New regulations for non-performing loans (incl. risk provisioning backstop) and forbearance

The supervisory expectations of the European Banking Authority and the European Central Bank with regard to the detection and handling of non-performing loans have developed and intensified considerably since the EBA ITS "On supervisory reporting on forbearance and non-performing exposures" in 2014. The main concretisations in this regard were made in March 2017 (ECB guidelines for banks on non-performing loans) and in March 2018 (EBA CP on Guidelines on management of non-performing and forborne exposures). This has now also had a partial impact on banking institutions domiciled in the EEA since March 2018, with major impacts yet to come with the next CRR at a later date. The all-clear for non-systemically relevant institutions in Germany can only be given superficially: The industry largely agrees that the ECB guidelines should become the new benchmark for German banking supervision!

NPL-Management & Governance

Non-performing loans will continue to be a top priority for both the EBA and the ECB in 2018, according to the ECB's own statements (e.g., on its homepage). Corresponding guidelines or draft versions containing concrete catalogues of measures have already been formulated and their inclusion in the next CRR appears beyond dispute. Banks with high NPL portfolios should formulate, implement and monitor a clear strategy for reducing these portfolios. Within the context of this strategy, clear quantitative targets must be defined within a fixed timeframe, which are reinforced by integrating the NPL strategy into the processes at all organisational levels. Control and decision-making processes must be aligned with the NPL strategy. In the course of the "3 Lines of Defence" already known from Operational Risk, the monitoring of the NPL strategy and NPL processes, including the effectiveness of defined early warning indicators, is continuously put to the test. In this context, systemically important financial institutions in particular must also satisfy additional disclosure requirements.


The subject of forbearance is certainly not new per se. However, according to the ECB Guidelines, virtually all institutions, regardless of their NPL holdings, are required to review their forbearance measures. This review includes the design of forbearance measures based on sub-portfolio classes, NPV-based support for decision-making on forbearance measures, back testing of measures (to prevent concealment or deferred counting of defaults) and monitoring of status transitions using migration matrices for forbearance and NPLs.

Risk provisioning backstop

Irrespective of the banks' NPL holdings, both the ECB and the EBA have formulated their expectations for conservative loan loss provisions for non-performing exposures. Institutions must build up a full provision for new exposures classified as NPLs within a certain period of time as long as these exposures continue to be considered non-performing. IN EFFECT, THIS APPLIES IMMEDIATELY! Even if the structure currently differs from the minimal to the complete provision for possible loan losses (as of summer 2018) in the specifications of the ECB and the EBA: Linear and progressive models are currently being discussed in order to prevent the clipping effect at the end of the period. The institutions concerned must ensure that both requirements can be met in equal measure and in a timely manner. We will be happy to help you!

Is your institute adequately prepared? Use the SKS Quick Check!

Use our convenient SKS Quick Check to test whether your institution fulfils the new NPL/Forbearance requirements. The test will let you know whether you’re all set to meet the new NPL/forbearance requirements and point out any potential vulnerabilities. Gain valuable insights with no obligation and request your copy of our NPL Quick Check today!