At the end of October, the European Banking Authority (EBA) published the final Guidelines on management of non-performing and forborne exposures. With the guidelines the EBA aims to ensure that credit institutions have adequate prudential tools and frameworks in place to manage their non-performing exposures (NPEs) effectively and to achieve a sustainable NPE reduction on their balance sheets.
The guidelines focus on the key elements of governance and operations in relation to a strategic NPE framework, covering aspects related to steering and decision-making, the NPE operating model, the internal control framework and NPE monitoring processes. The guidelines state that credit institutions with gross non-performing loans (NPL) ratios at a level of 5% or higher should establish a NPE strategy and formulate the related governance and operational arrangements. This threshold should not be considered as an optimal level of NPLs.
Regarding the management of forborne exposures (FBEs), the EBA stresses that any forbearance measures should only be granted when they aim to restore sustainable repayment by the borrower and are thus in the borrower’s interests. The guidelines also explain on the estimation of future cash flows as a result of foreclosure, and require credit institutions to have in place policies for timely impairments and write-offs. Finally, the guidelines set out requirements for the supervisory assessment of credit institutions’ NPE management activities as part of the Supervisory Review and Evaluation Process (SREP).