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Minimum loss coverage for non-performing exposures

03-07-2018

In March 2018, the European Commission presented a proposal to introduce statutory backstops for 'non-performing exposures'. These concern loans, debt securities or certain overdue off-balance-sheet items. Since the financial crisis, the EU has aimed to address the high numbers of these non-performing exposures, including in particular non-performing loans, as they risk destabilising the financial sector and thereby the EU economy. This briefing provides an initial appraisal of the quality of the ...

In March 2018, the European Commission presented a proposal to introduce statutory backstops for 'non-performing exposures'. These concern loans, debt securities or certain overdue off-balance-sheet items. Since the financial crisis, the EU has aimed to address the high numbers of these non-performing exposures, including in particular non-performing loans, as they risk destabilising the financial sector and thereby the EU economy. This briefing provides an initial appraisal of the quality of the impact assessment accompanying the Commission proposal

Free movement of capital within the European Union

31-05-2018

Amongst the four fundamental freedoms that underpin the EU single market (free movement of persons, goods, services and capital), the free movement of capital is the most recent. Until the mid-1990s it did not exist in practice in a number of Member States. Financial operations in other Member States or in other currencies within the EU were subject to prior authorisation requirements by national authorities. These controls enabled national authorities to prevent or restrict financial operations. ...

Amongst the four fundamental freedoms that underpin the EU single market (free movement of persons, goods, services and capital), the free movement of capital is the most recent. Until the mid-1990s it did not exist in practice in a number of Member States. Financial operations in other Member States or in other currencies within the EU were subject to prior authorisation requirements by national authorities. These controls enabled national authorities to prevent or restrict financial operations. Free movement of capital became applicable with the 1993 Maastricht treaty, which removed all restrictions on capital movements and payments, both between Member States and with third countries. The principle has direct effect, meaning that it requires no further legislation at either EU or Member State level.

Bankenunion – Jahresbericht 2017

22-02-2018

Auf der Februar-II-Plenartagung soll über den Initiativbericht über die Bankenunion im Jahr 2017 abgestimmt werden. Dabei geht es um die zwischenbehördliche Zusammenarbeit, die mit den Bankbilanzen verbundenen Risiken, aufsichtsrechtliche Vorschriften und neue Herausforderungen. Es wird auch festgestellt, dass die Bankenunion solange unvollendet bleibt, bis eine fiskalische Letztsicherung und ein europäisches Einlagenversicherungssystem geschaffen wurden.

Auf der Februar-II-Plenartagung soll über den Initiativbericht über die Bankenunion im Jahr 2017 abgestimmt werden. Dabei geht es um die zwischenbehördliche Zusammenarbeit, die mit den Bankbilanzen verbundenen Risiken, aufsichtsrechtliche Vorschriften und neue Herausforderungen. Es wird auch festgestellt, dass die Bankenunion solange unvollendet bleibt, bis eine fiskalische Letztsicherung und ein europäisches Einlagenversicherungssystem geschaffen wurden.

The Provision of Critical Functions at Global, National and Regional Level - Is there a need for further legal/regulatory clarification if liquidation is the default option for failing banks?

30-11-2017

This paper defines critical banking functions and considers whether there is a need for further legal/regulatory clarification if liquidation is the default option for failing banks. We rely on EU law and soft law principles (FSB) bearing in mind that ‘liquidation’ is at times a loosely defined concept. Despite efforts to agree upon a set of qualitative and quantitative criteria to assess the critical nature, or lack thereof, of relevant functions we argue that simplification is needed. Given the ...

This paper defines critical banking functions and considers whether there is a need for further legal/regulatory clarification if liquidation is the default option for failing banks. We rely on EU law and soft law principles (FSB) bearing in mind that ‘liquidation’ is at times a loosely defined concept. Despite efforts to agree upon a set of qualitative and quantitative criteria to assess the critical nature, or lack thereof, of relevant functions we argue that simplification is needed. Given the discretionary element in the determination of public interest and critical functions and the existence of different legal sources with different purposes, we recommend a consistent application of the resolution rules to build up credibility in the Banking Union project, considering in particular the differential treatment by the competent resolution authorities in recent Spanish and Italian liquidation and resolution cases.

Externe Autor

Rosa M. Lastra, Rodrigo Olivares-Caminal, Costanza A. Russo

The provision of critical functions at global, national or regional level

30-11-2017

The introduction of a bank resolution framework for EU banks has created the need for clear legal definitions of the main elements in resolution. This paper assesses one of these elements, namely “critical functions”, which encompasses the activities of a bank that are of significant importance for the real economy. The assessment of the regulation and implementation shows that there is room for sharpening the definition and equal application across all banks. It is questionable, however, whether ...

The introduction of a bank resolution framework for EU banks has created the need for clear legal definitions of the main elements in resolution. This paper assesses one of these elements, namely “critical functions”, which encompasses the activities of a bank that are of significant importance for the real economy. The assessment of the regulation and implementation shows that there is room for sharpening the definition and equal application across all banks. It is questionable, however, whether regulatory intervention is necessary given the on-going work of authorities at different levels. In turn, legislative intervention will be required to align the objectives of the resolution framework and state aid. The latter currently leaves more room for public support measures, which are not necessarily in the public interest.

Externe Autor

Willem Pieter de Groen

Provisioning policies for non-performing loans: How to best ensure a “clean balance sheet”?

16-11-2017

In view of a regular public hearing with the Chair of the Supervisory Board of the ECB in ECON on 9 November 2017, some academic experts for banking supervision were asked to assess which provisioning practices best ensure from a prudential perspective that banks present “sound and clean balance sheets” that do not carry uncovered or hidden losses. Some of the points raised by the experts in their briefing papers are highlighted in the following summary.

In view of a regular public hearing with the Chair of the Supervisory Board of the ECB in ECON on 9 November 2017, some academic experts for banking supervision were asked to assess which provisioning practices best ensure from a prudential perspective that banks present “sound and clean balance sheets” that do not carry uncovered or hidden losses. Some of the points raised by the experts in their briefing papers are highlighted in the following summary.

Regular public hearing with Danièle Nouy, Chair of the Supervisory Board - ECON on 9 November 2017

07-11-2017

This note is prepared in view of a regular public hearing with the Chair of the Supervisory Board of the European Central Bank (ECB) as referred to in Regulation 1024/2013 and the Interinstitutional Agreement between the European Parliament and the ECB. The following issues are addressed in this briefing: the ECB addendum on NPLs, the LCR ratio in case of Banco Popular, the Supervisory Banking Statistics for the second quarter of 2017, recent guidance documents published by the SSM, and recent external ...

This note is prepared in view of a regular public hearing with the Chair of the Supervisory Board of the European Central Bank (ECB) as referred to in Regulation 1024/2013 and the Interinstitutional Agreement between the European Parliament and the ECB. The following issues are addressed in this briefing: the ECB addendum on NPLs, the LCR ratio in case of Banco Popular, the Supervisory Banking Statistics for the second quarter of 2017, recent guidance documents published by the SSM, and recent external briefing papers provided for the ECON Committee.

Provisioning policies for non-performing loans: How to best ensure a “clean balance sheet”?

06-11-2017

This note provides an updated picture on NPLs in the European Union, showing that – although the NPL ratio has been steadily decreasing, significant differences remain across Member States. It then discusses the two main factors driving NPLs in the long term: the macroeconomic cycle and the banks’ lending practices, arguing that policy makers should continue to encourage the development of sound internal credit ratings. Finally, four main levers are discussed, that can be used to curb high NPL stocks ...

This note provides an updated picture on NPLs in the European Union, showing that – although the NPL ratio has been steadily decreasing, significant differences remain across Member States. It then discusses the two main factors driving NPLs in the long term: the macroeconomic cycle and the banks’ lending practices, arguing that policy makers should continue to encourage the development of sound internal credit ratings. Finally, four main levers are discussed, that can be used to curb high NPL stocks. Internal recovery processes, which should be improved by investing in better IT architectures and specialised professional skills. NPL sales, which may prove attractive (and reduce the supervisors’ own reputational risks), but also to destroy value for bank shareholders, debtholders and the public purse. Asset management companies (AMCs), which may prevent banks from disorderly liquidating NPLs, force badly-managed banks to feel the pain of past mistakes and gradually recover loans while being funded at an acceptable cost. Calendar provisioning regimes like the one recently proposed by the SSM, which may force banks to quickly write down non performing exposures, but may suffer from several drawbacks and should be enacted through a fully-fledged, accountable political process. In designing ways to tackle non-performing exposures, one should never forget that NPLs, while being associated with modest profits and poor loan supply, do not cause them but, like them, follow from poor real growth, ineffective management and faulty governance schemes.

Externe Autor

Andrea Resti

Provisioning policies for non-performing loans: How to best ensure a “clean balance sheet”?

06-11-2017

New provisioning rules introduced by IFRS 9 are expected to reduce the procyclicality of provisioning. Heterogeneity among banks in the procyclicality of provisioning may not only reflect the formal accounting rules, but also variation in discretionary provisioning policies. This paper presents empirical evidence on the heterogeneity of provisioning procyclicality among significant banks that are directly supervised by the ECB. In particular, this paper finds that provisioning is relatively procyclical ...

New provisioning rules introduced by IFRS 9 are expected to reduce the procyclicality of provisioning. Heterogeneity among banks in the procyclicality of provisioning may not only reflect the formal accounting rules, but also variation in discretionary provisioning policies. This paper presents empirical evidence on the heterogeneity of provisioning procyclicality among significant banks that are directly supervised by the ECB. In particular, this paper finds that provisioning is relatively procyclical at banks that have i) high loans-to-assets ratios, ii) high shares of non-interest income in total operating income, iii) low capitalization rates, and iv) low total assets. Supervisory guidance provided to banks on how to implement IFRS 9 has mostly been of a qualitative nature, and may prove inadequate to prevent an undesirably wide future variation in provisioning among EU banks.

Externe Autor

Harry Huizinga

Provisioning policies for non-performing loans: How to best ensure a “clean balance sheet”?

06-11-2017

Non-performing loans (NPLs) are still an important problem in Europe, in particular in the euro area. Provisioning is one way to address such a problem. Although coverage ratios have been increasing in recent years, banks’ provisioning policies are quite different across banks and countries. Various reasons, ranging from different collateral characteristics and enforcement systems to tax regimes, accounting methods, managerial and supervisory practises, contribute to explain the observed differences ...

Non-performing loans (NPLs) are still an important problem in Europe, in particular in the euro area. Provisioning is one way to address such a problem. Although coverage ratios have been increasing in recent years, banks’ provisioning policies are quite different across banks and countries. Various reasons, ranging from different collateral characteristics and enforcement systems to tax regimes, accounting methods, managerial and supervisory practises, contribute to explain the observed differences. Recent measures aimed at increasing transparency and disclosure rules and the adoption of new accounting rules are an important step forward. They have to be complemented, however, by appropriate early intervention measures and effective supervisory power.

Externe Autor

Elena Carletti; Bruno Brunella

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