COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK First Progress Report on the Reduction of Non-Performing Loans in Europe
Date: 2018-01-18
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: action programme, banking supervision, banking system, credit institution, economic recession, economic stabilisation, financial control, financial solvency, loan

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 18.1.2018 COM(2018) 37 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK First Progress Report on the Reduction of Non-Performing Loans in Europe   {SWD(2018) 33 final}  
 
 
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK 

First Progress Report on the Reduction of Non-Performing Loans in Europe 

1.  ADDRESSING NON-PERFORMING LOANS AS PART OF RISK REDUCTION 

IN THE FINANCIAL SECTOR 

Following  the  financial  crisis,  the  regulatory  framework  for  banks  has  changed 
substantially.  The  European  Union  has  taken  the  lead  in  implementing  reforms  agreed 
globally at the level of the G20 and in the Basel Committee with the objective of reinforcing 
financial stability, reducing risk in the banking sector, and avoiding that taxpayers have to 
contribute financially to the costs of failing banks.  

In  addition  to  significantly  more  stringent  capital  and  liquidity  requirements  for  banks,  as 
well as the obligation for all banks to hold sufficient amounts of “bail-inable” capital for the 
purpose  of  resolution,  the  institutional  arrangements  for  the  supervision  and  resolution  of 
banks  in  the  Union,  and  notably  in  the  euro  area,  have  been  strengthened  fundamentally 
with the establishment of Banking Union and two of its three pillars, the Single Supervisory 
Mechanism  and  the  Single  Resolution  Board.1  As  a  result  of  these  measures,  the  EU 
banking  sector  is  in  a much  better  shape  than  in  previous years.  Since  2014,  banks  in  the 
euro  area  have  increased  their  capital  by  EUR  234  billion  and  added  EUR  813  billion  of 
liquid assets. Euro area banks have over recent years reduced their holdings of government 
debt  with  a  decrease  by  17%  between  2015  and  2017  and  thereby  also  reducing  their 
financial  connection  with  their  sovereigns.  In  November  2016,  the  Commission  proposed 
further  risk-reducing  measures,  including  changes  to  the  Capital  Requirements  Directive 
and Regulation 2  and a proposal dealing with business insolvency, restructuring and second 
chance.3 The Commission is also pursuing work on Capital Markets Union (CMU) as one of 
its highest priorities. 

High  stocks  of  Non-Performing  Loans  (NPLs),  in  certain  banks  and  Member  States,  are 
being reduced. The average ratio of NPLs has decreased by one third since 2014 and is on a 
steady downward trend. High stocks of NPLs can weigh on a bank's short- and longer-term 

1 The third pillar of Banking Union, the European Deposit Insurance Scheme, was proposed by the Commission in 
November  2015.  In  October  2017  the  Commission,  in  its  Communication  on  Completing  the  Banking  Union 
[COM(2017) 592], gave new impetus to the negotiations on the European Deposit Insurance Scheme (EDIS). 

2 The Commission proposals will require banks to build up buffers of liabilities that can, if necessary, be bailed in, 
by implementing the Total Loss Absorbing Capacity standard of the Financial Stability Board and integrate it into 
the  existing  rules  on  the  Minimum  Requirement  for  own  funds  and  eligible  liabilities;  and  by  providing  for 
harmonised  rules  on  where  debt  instruments  eligible  to  meet  the  Total  Loss  Absorbing  Capacity  /  Minimum 
Requirement for own funds and Eligible Liabilities buffers stand in the bank creditor hierarchy. The Commission 
proposals also provide for harmonised rules concerning the application of moratorium tools applied by supervisors 
and resolution authorities to stabilise banks, which are equally important based on recent experience.. Finally, the 
Banking  Package  proposes  to  implement  a  number  of  international  standards,  including  the  introduction  of  a 
leverage ratio and a Net Stable Funding Ratio (NSFR), 

3 COM/2016/0723 final - 2016/0359 (COD) 

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performance through two main channels. First, NPLs require higher levels of provisioning. 
Loan  provisions  reduce  bank  profitability  and  reduce  the  bank's  regulatory  capital.  In  the 
most severe cases, the necessary accounting for NPLs can put in question the viability of a 
bank  with  potential  implications  for  financial  stability.  Second,  NPLs  tie  up  significant 
amounts of a bank's resources, both human and financial. This reduces the bank's capacity to 
lend, including to small and medium-sized enterprises which rely on bank lending to a much 
greater extent  than larger companies, thereby  affecting economic growth and job creation. 
For these reasons, the Commission has for a long time highlighted the urgency of taking the 
necessary measures to address the risks related to NPLs.  

Addressing  high  stocks  of  NPLs  and  their  possible  future  accumulation  is  essential  to 
complete  Banking  Union,  and  well  developed  secondary  markets  of  NPLs  are  one  of  the 
building  blocks  for a  well-functioning  Capital Markets Union. Such elements  form a  key 
priority under the EU's agenda to deepen the Economic and Monetary Union, as set out in 
the Commission's Reflection Paper of May 20174 Moreover, an integrated financial system 
will  enhance  the  resilience  of  the  Economic  and  Monetary  Union  to  adverse  shocks  by 
facilitating private risk-sharing across borders, while at the same time reducing the need for 
public  risk-sharing.  The  Commission's  EMU  package  of  6  December  2017  presented  a 
roadmap  and  concrete  proposals  for  the  deepening  of  Europe's  Economic  and  Monetary 
Union, which is part of a More United, Stronger and More Democratic Union.5  

The primary responsibility for tackling high NPL ratios remains with the affected banks and 
Member States. The Commission has consistently mentioned this matter, for the countries 
concerned,  in  the  context  of  the  European  Semester.  However,  there  is  also  a  clear  EU 
dimension to reducing current NPL ratios, as well as preventing any build-up of NPLs in the 
future, given the interconnectedness of the banking system of the EU and particularly of the 
euro area. In particular, there are important spillover effects from Member States with high 
NPL ratios to the EU economy as a whole, both in terms of economic growth and financial 
stability.  

Reflecting  this  EU  dimension  and  building  on  the  high  level  of  agreement  on  the  need  to 
continue and extend the actions already initiated by the Commission, the Council adopted in 
July 2017 an "Action Plan To Tackle Non-Performing Loans in Europe". This Action Plan 
calls upon various institutions – including the Commission – to take appropriate measures to 
further  address  the  challenges  of  high  NPL  ratios  in  Europe.  Furthermore,  the  Council 
agreed  in  its  Conclusions  to  revert  to  this  issue regularly  and  initially  after  six  months, in 
order to take stock of the evolution of NPLs in the Union on the basis of a stock-take from 
the  Commission.  This  Communication,  together  with  the  accompanying  Staff  Working 
Document, is the first progress report on the implementation of the Action Plan. The Staff 
Working  Document  includes  contributions  from  other  EU  stakeholders,  who  were  also 
invited by the Council, along with the Commission, to take action to support and accelerate 
the resolution of NPLs in the Union. 

4 COM(2017) 291 
5 COM (2017) 821 

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2.  RECENT EVOLUTION OF NON-PERFORMING LOANS 

As mentioned above, the general improvement in NPL ratios over recent years continued in 
2017.  The  quality  of  banks’  loans  portfolios  continued  to  improve.  The  latest  figures 
confirm the downward trend of the NPL ratio, which declined to 4.6% (Q2 2017), down by 
roughly  1 percentage  point  year-on-year  (cf.  Figure  1).    As  a  result,  the  ratio  reached  its 
lowest level since Q4 2014. The provisioning ratio 6 has also risen, amounting to 50.8% (Q2 
2017). 

NPL  ratios  have  been  recently  falling  in  nearly  all  Member  States,  although  the  situation 
differs  significantly  across  Member  States.  Several  still  have  high  NPL  ratios  (9  Member 
States had ratios above 10% at the end of the second quarter of 2017) and others have very 
low  ratios  (10  Member  States  have  ratios  below  3%).  The  accompanying  Staff  Working 
Document reports in detail on the evolution of NPLs and on policy measures in a selection 
of countries with high NPL ratios.  

There is evidence of encouraging progress in reducing NPL ratios in these Member States, 
due to a combination of policy actions and economic growth. However, NPLs continue to 
pose risks to economic growth and financial stability. The total volume of NPLs across the 
EU  is  still  at  the  level  of  EUR 950  billion,  clearly  above  pre-crisis  levels.7  Structural 
impediments continue to hamper a faster fall in NPL stocks. Among other elements, activity 
on  secondary  markets  for  Non-Performing  Loans  is  not  yet  sufficient  to  substantially 
contribute  to  NPL  reduction  efforts,  notwithstanding  the  increased  interest  from  certain 
investor  groups  and  the  increasing  volume  of  NPL-related  transactions.  Moreover,  debt 
restructuring, insolvency and debt recovery processes are still too slow and unpredictable in 
some cases. 

6  Source:  ECB.  Due  to  the  unavailability  of  provisioning  data  for  loans,  the  provisioning  ratio  for  the  EU  was 
calculated  by  considering  impairments  and  Non-Performing  Loans  for  all  debt  instruments  (loans  and  debt 
securities). 
7 Source: ECB. 

3 

456Dec 14Jun 15Dec 15Jun 16Dec 16Jun 17Source: European Central BankFigure 1:  Non-performing loans in the EUEU total gross non-performing loans and advances, in % of total gross loans and advances, end-of-quarter values% 
 
 
                                                            
3.  TOWARDS  A  COMPREHENSIVE  PACKAGE  OF  MEASURES  TO  ADDRESS 

NON-PERFORMING LOANS  

The Commission has devoted significant attention to addressing the issue of NPLs since the 
outset of the financial crisis in 2008/9.  For banks,  whose viability was threatened by high 
NPL ratios, the Commission has assisted Member States in setting up ad-hoc and system-
wide measures with the objective of reducing NPL stocks (sometimes as part of a financial 
assistance  programme)  through  solutions  compatible  with  State  aid  rules  such  as  specific 
impaired  assets  measures  for  banks,  winding  down  vehicles  and/or  market  compatible 
structures,  which  entailed  a  substantial  reduction  of  the  stock  of  Non-Performing  Loans 
present in the banking sector. In this way, it has incentivised banks to manage and reduce 
their NPLs via market mechanisms and thus protected tax payers from bearing the costs via 
adequate burden sharing and in-depth restructuring. The need to take determined action to 
address  high  NPL  ratios  has  also  been  underlined 
the  European  Semester 
recommendations to relevant Member States. The European Central Bank in its supervisory 
capacity  (the  Single  Supervisory  Mechanism),  national  competent  authorities  and  the 
European  Banking  Authority  have  also  played  an  important  role  in  enhancing  the 
supervision and reporting of NPLs in Europe, while the European Central Bank has had an 
integral part in safeguarding financial stability in the Union. 

in 

Moving  forward,  this  comprehensive  approach  to  addressing  high  NPL  ratios  must  be 
maintained  and,  as  set  out  in  the  Council  Action  Plan,  it  should  focus  on  a  mix  of 
complementary  policy  actions  in  four  areas:  (i) supervisory  actions,  (ii)  reform  of 
restructuring,  insolvency  and  debt  recovery  frameworks,  (iii)  development  of  secondary 
markets for distressed assets, and (iv) fostering restructuring of the banking system. Action 
in these areas should be at national level and at Union level where appropriate.  

For  its  part,  the  Commission  is  committed  to  delivering  on  those  elements  of  the  NPL 
Action  Plan  for  which  it  has  direct  responsibility.  The  Commission  announced,  in  its 
Communication  on  Completing  the  Banking  Union  in  October  2017,  a  comprehensive 
package for tackling high NPL ratios by spring 2018.8 Significant progress has already been 
made and delivery of the package of measures  – including 3 legislative proposals9 – is on 
track for spring 2018.  

The package will consist of the following measures:  

  A Blueprint for how national Asset Management Companies (AMCs) can be set up in 
compliance with existing EU banking and State aid rules by building on best practices 
learned  from  past  experiences  in  Member  States.  In  addition  to  developing  the 
blueprint  for  national  AMCs,  the  Commission  intends  where  relevant  to  continue 
analysing  other  proposed  impaired  asset  relief  measures  which  are  alternatives  to 
centralised AMCs, in full respect of the BRRD, SRMR and State Aid rules. 

  Measures to further develop secondary markets for Non-Performing Loans, especially 
with the aim of removing undue impediments to loan servicing by third parties and the 
transfer of loans. 

8 COM (2017) 592 
9 The Commission has held stakeholder consultations pertaining to the three potential legislative initiatives. 

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  Measures  to  enhance  the  protection  of  secured  creditors  by  allowing  them  more 
efficient  methods  of  value  recovery  from  secured  loans  through  Accelerated 
Extrajudicial Collateral Enforcement (AECE). This refers to an expedited and efficient 
out-of-court  enforcement  mechanism  which  enables  secured  lenders  to  recover  value 
from collateral granted solely by companies and entrepreneurs to secure loans.10  

 

Introduce  statutory  prudential  backstops  to  prevent  the  risk  of  under-provisioning  of 
NPLs.  Such  backstops,  on  newly  originated  loans  that  later  turn  non-performing, 
would  amount  to  minimum  levels  of  provisions  and  deductions  from  own  funds  that 
banks  would  be  required  to  make  to  cover  incurred  and  expected  losses.  In  this 
context, the Commission  will also consider introducing a  common definition of non-
performing exposures (NPE), in accordance with the one already used for supervisory 
reporting purposes. 

  A  way  forward  to  foster  the  transparency  on  NPLs  in  Europe  by  improving  the  data 
availability  and  comparability  as  regards  NPLs,  and  potentially  supporting  the 
development by market participants of NPL information platforms or credit registers.11 

In  addition  to  this  package,  and  as  mentioned  above,  the  Commission  presented  in 
November  2016,  in  the  context  of  the  Capital  Markets  Union  work,  a  proposal  for  a 
Directive on restructuring, second chance and efficiency of insolvency12. The key features 
of  this  proposal,  in  particular  the  availability  of  restructuring  procedures  enabling  viable 
companies in financial difficulties to avoid insolvency as well as measures to enhance the 
effectiveness  of  restructuring  and  insolvency  proceedings,  would  contribute  to  reducing 
NPLs as well as preventing their accumulation in the future. The Commission calls on the 
European  Parliament  and  the  Council  to  progress  swiftly  on  this  important  proposal, 
following the detailed examination by the Justice and Home Affairs Council and the recent 
exchange  of  views  in  the  Ecofin  Council.  The  Commission  also  clarified  in  the  Single 
Supervisory  Mechanism  Review  Report,  accompanying  the  Communication  from  October 
2017, the interpretation of the relevant Articles of the Capital Requirement Directive (CRD) 
and  the  Single  Supervisory  Mechanism  Regulation.  The  Commission  confirmed  that  the 
supervisory powers enshrined therein allow the competent authorities to influence a bank's 
provisioning  policy  with  regard  to  NPLs  within  the  limits  of  the  applicable  accounting 
framework and to apply specific adjustments where necessary for prudential purposes.13 

10 Work in this area will be determined by the Impact Assessment and remain consistent with and complementary to 
the  Commission  proposal  of  November  2016  for  a  Directive  on  restructuring,  second  chance  and  efficiency  of 
insolvency frameworks and would not require harmonisation of actual insolvency provisions. 

11  In  addition,  since  the  management  of  Non-Performing  Loans  would  benefit  from  more  efficient  and  more 
predictable  loan  enforcement  and  insolvency  frameworks,  the  Commission  is  also  undertaking  a  benchmarking 
exercise  of  loan  enforcement  regimes  to  establish  a  reliable  picture  of  the  delays  and  value-recovery  banks 
experience  when  faced  with  borrowers'  defaults,  and  invites  close  cooperation  from  Member  States  and 
supervisors  to  develop  a  sound  and  significant  benchmarking  methodology.  In  this  context,  the  Commission 
proposal  for  a  Directive  on  business  insolvency,  restructuring  and  second  chance  lays  down  obligations  on 
Member States to collect comparable data on insolvency and restructuring proceedings and communicate it to the 
Commission  which  would  be  crucial  in  order  to  demonstrate  the  efficiency  of  the  regulatory  framework  in 
Member States as regards insolvent debtors. 

12 COM/2016/0723 final - 2016/0359 (COD) 
13 COM (2017) 591 

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The  Staff  Working  Document  accompanying  this  Communication  offers  a  detailed 
overview  by  Commission  services'  of  the  progress  made  in  the  overall  implementation  of 
the  overall  Council  Action  Plan.  This  includes  measures  under  the  responsibility  of  the 
Commission and measures under the responsibility of other institutions and agencies.  

Overall,  the  progress  made  so  far  on  all  fronts  is  encouraging.  These  efforts  should  be 
maintained by all actors, with the purpose of completing all the measures envisaged in the 
Action Plan, so as to attain a sustainable solution for NPLs throughout the Union. 

4.  CONCLUSIONS 

In line with the overall significant progress on risk reduction in the EU banking sector, the 
ratio of NPLs continues to decline in the Union. Despite this positive trend, high NPL ratios 
remain an important challenge for several Member States and for the Union as a whole. The 
Action  Plan,  agreed  by  the  Council  in  July  2017,  was  a  major  step  in  addressing  this 
challenge.  This  first  assessment  shows  important  progress  is  being  made  in  the 
implementation of the Action Plan.  

It  is  necessary  to  maintain  this  pace  of  progress  in  implementing  the  Action  Plan  in  the 
coming months and years, if the challenge of high NPLs is to be addressed both in terms of 
reducing  existing  stocks  to  sustainable  levels  and  preventing  any  future  accumulation. 
While  work  needs  to  continue  at  a  sustained  pace  at  the  level  of  individual  banks  and 
Member  States  concerned,  continued  concerted  action  by  the  Commission  and  other  EU 
institutions, including the European Central Bank, is required at EU level. The Commission 
will  present  a  dedicated  package  of  measures  in  spring  2018  including  a  number  of 
legislative  proposals  to  facilitate  the  management  of  NPLs  by  banks  and  avoid  the 
accumulation of new NPLs in the future.  

The Commission will continue to follow this matter closely and will report again in March 
2018 at the latest. 

6