Non-performing loans - new EU measures

Amendments to the securitisation regulation and capital requirement regulations

On 9 December 2020 the negotiators from the Economic and Monetary Affairs Committee and the European Council reached agreement on amendments to the Capital Requirements Regulation and the Securitisation Regulation (the Regulations). On 15 December, the European Council issued the final compromise text to the Permanent Representatives Committee. The formal adoption of the final texts is targeted for February 2021.  Under the terms of the Withdrawal Agreement between the UK and the EU, any EU law that is legally binding at the end of the transition period (31 December 2020) will continue to apply in the UK after that date. We await confirmation on whether these amendments (or a version of these amendments) will be adopted in the UK.

The amendments to the Regulations put forward by the European Commission on 24 July 2020, in response to the need to put measures in place to assist economic recovery following the COVID 19 crisis, included amendments to:

• extend the STS regime for balance sheet synthetic securitisations, which would allow banks to transfer certain risks to the market, thus allowing the bank to benefit from a prudential treatment reflecting the real risk of these instruments. A more detailed analysis of the amendments is provided here; and
• remove the regulatory impediments to allow for the securitisation of non-performing loans (NPLs), a more detailed analysis of the amendments is provided here. 

The aim of the amendments is to allow banks to improve their regulatory capital position and enable them to lend to small and medium sized enterprises and households.  

The European Commission's NPL action plan

On 16 December 2020 the European Commission presented a strategy (the Strategy) to prevent a future build-up of NPLs across the EU. The Strategy builds on measures previously implemented in the context of Economic and Financial Affairs Council’s NPL action plan of 2017. 

The Strategy has four main goals:

1. To further develop secondary markets for distressed assets, which will allow banks to move NPLs off their balance sheets, while ensuring further strengthened protection for debtors. This will be undertaken by, inter alia:

• Swift agreement of its proposed Directive to allow banks to move NPLs off their balance sheet and to  ensure  debtor protection in the secondary market;
• Amendments to the Securitisation Regulation (discussed above) allowing NPL securitisations;
• Establishing a data hub at a European level which would act as a data repository accessible by the key participants in the NPL market;
• Addressing regulatory impediments to NPL sales by banks. The European Commission acknowledged that, together with the European Banking Authority, it will implement a suitable approach to the regulatory treatment of purchased defaulted assets and the risk weights that banks need to apply to calculate the capital requirements under the Standardised Approach for credit risk. Currently a purchaser of an NPL needs to apply a higher risk weight to the NPL than the seller was required to apply. The European Commission believes that addressing this issue would benefit smaller banks purchasing NPLs and increase buy-side competition; and
• Developing guidance for sellers of NPLs on a “best execution” sales process.

1. To reform the EU’s corporate insolvency and debt recovery legislation, which will help converge the various insolvency frameworks across the EU, while maintaining high standards of consumer protection. This will be achieved by inter alia:

• Agreement between the European Parliament and Council on their proposal for a Directive for minimum harmonisation rules on accelerated extrajudicial collateral enforcement (which agreement the European Commission has urged). This will allow for legal certainty and recovery by both creditor and debtor;
• The transposition of Directive EU 2019/1023 on preventive restructuring frameworks, which requires action to be taken before entities go into default; and
• Continued work by the European Commission (as announced in the 2020 Capital Markets Union Plan) on harmonisation of insolvency law regarding the opening of insolvency proceeds, ranking of claims, avoidance actions, tracing of assets in an insolvency estate and asset valuation.

1. To support the establishment and cooperation of national asset management companies (AMCs) at EU level. Measures include inter alia:

• Allowing impaired commercial real estate and large corporate exposures to be moved to an AMC.  The European Commission acknowledges that a number of factors would make it difficult to set up a single European AMC. These factors include the diversity of NPLs andthe different national rules on restructuring, insolvency and collateral enforcement;
• Permitting national AMCs to exchange practices and experiences at an EU level which would increase transparency and improve efficiencies at a national level; and
• Support from the European Commission to interested Member States in setting up national AMCs through the existing AMC Blueprint (which explains how an AMC can be set up, conditions for asset transfer and the effective operation of an AMC).

1. To implement precautionary public support measures, where needed, to ensure the continued funding of the real economy under the EU’s Bank Recovery and Resolution Directive and State Aid frameworks.

• The European Commission acknowledges that Member States through various policies have indirectly protected banks from potential credit losses. It reiterates that market based solutions should be used in tackling NPLs, but does provide that measures under BRRD and the State Aid framework are available to solvent banks.

The proposed amendments to the Securitisation Regulation to deal with NPLs and the European Commission’s Strategy have been long awaited by the market, which is expected to see a rise in NPLs in 2021. While the amendments set out in the Securitisation Regulation will apply to the 27 Member States (expected to be in H1 2021), we await both national and European measures to give effect to the Strategy, and it is unlikely that we will see any real developments on this in H1 of 2021.