Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures
Date: 2018-03-14
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU banking union, action programme, bank, banking supervision, banking system, capital market, credit policy, financial risk, financial solvency, loan

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   EUROPEAN COMMISSION  Brussels, 14.3.2018 COM(2018) 134 final 2018/0060 (COD)  Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures  (Text with EEA relevance) {SWD(2018) 73 final} - {SWD(2018) 74 final}  
 
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

This  proposal  is  an  important  part  of  the  work  to  strengthen  Europe’s  Economic  and 
Monetary Union (EMU). A more integrated financial system will enhance the resilience of the 
EMU to adverse shocks by facilitating private risk-sharing across borders, while at the same 
time  reducing  the  need  for  public  risk-sharing.  In  order  to  achieve  these  objectives,  the  EU 
must  now  complete  the  Banking  Union  and  put  in  place  all  building  blocks  for  a  Capital 
Markets  Union  (CMU).  The  Commission's  Communication  of  11  October  20171  sets  out  a 
way forward to complete the Banking Union by promoting risk reduction and risk sharing in 
parallel, as part of the roadmap to strengthen EMU set out by the Commission on 6 December 
2017.2 

Addressing  high  stocks  of  non-performing  loans  (NPLs)  and  non-performing  exposures 
(NPEs)3  as  well  as  their  possible  accumulation  in  the  future  is  an  important  part  of  the 
Union’s  efforts  to  further  reduce  risks  in  the  banking  system  and  enable  banks  to  focus  on 
lending to businesses and citizens. On-going discussions in the Council confirm that further 
advances  in  addressing  NPLs  are  essential  to  complete  Banking  Union  which  forms  a  top 
priority in the Leaders’ Agenda.  

High stocks of NPLs can weigh on bank performance through two main channels. First, NPLs 
generate  less  income  for  a  bank  than  performing  loans  and  thus  reduce  the  bank’s 
profitability,  and  may  cause  losses  that  reduce  its  capital.  In  the  most  severe  cases,  these 
effects can jeopardise 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 
(SMEs). 

SMEs are particularly affected by the reduced credit supply, as they rely on bank lending to a 
much  greater  extent  than  larger  companies,  thereby  affecting  economic  growth  and  job 
creation.  Bank  lending  is  often  overly  expensive  and  bank  lending  volumes  to  SMEs  have 
been severely affected by the 2008 financial crisis. This impedes the development and growth 
of SMEs. 

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3 

Communication  to  the  European  Parliament,  the  Council,  the  European  Central  Bank,  the  European 
Economic and Social Committee and the Committee of the Regions on completing the Banking Union, 
COM(2017) 592 final, 11.10.2017. 
Communication from the Commission to the European Parliament, the European Council, the Council 
and  the  European  Central  Bank  -  further  steps  towards  completing  Europe's  economic  and  monetary 
union: a roadmap, COM(2017) 821 final, 06.12.2017. 
NPEs include NPLs, non-performing debt securities and non-performing off-balance-sheet items. NPLs 
represent the largest share of NPEs and this term is commonly used as pars pro toto. NPLs denote loans 
where  the  borrower  faces  difficulties  to  make  the  scheduled  payments  to  cover  interest  or  capital 
reimbursements. When the payments are more than 90 days past due, or the loan is assessed as unlikely 
to be repaid by the borrower, it is classified as an NPL.  

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Well-developed secondary markets  for NPLs are also one of the building blocks for a well-
functioning  CMU4.  One  of  the  main  objectives  driving  the  Commission's  priority  of 
establishing the CMU is to  provide new sources of financing for EU businesses, SMEs and 
high-growth  innovative  companies  in  particular.  While  the  CMU  project  is  focused  on 
facilitating  access  to  and  diversifying  non-bank  finance  for  EU  businesses,  it  also 
acknowledges  the  important  role  played  by  banks  in  financing  the  EU economy.  Therefore, 
one  of  the  CMU  work  streams  aims  at  enhancing  banks'  capacity  to  lend  to  businesses, 
including  through  strengthening  their  ability  to  recover  value  from  collateral  provided  to 
secure loans. 

High  levels  of  NPLs  must  be  addressed  by  a  comprehensive  approach.  While  the  primary 
responsibility for tackling high levels of NPLs remains with banks and Member States5, there 
is  also  a  clear  EU  dimension  to  reduce  current  stocks  of  NPLs,  as  well  as  preventing  any 
excessive  build-up  of  NPLs  in  the  future  given  the  interconnectedness  of  the  EU’s  banking 
system and in particular that of the euro area. In particular, there are important potential spill-
over effects from Member States with high NPL levels to the EU economy as a whole, both in 
terms of financial stability and economic growth.  

The  need  for  decisive  and  comprehensive  action  was  recognised  in  the  "Action  Plan  To 
Tackle Non-Performing Loans in Europe" endorsed by the ECOFIN Council on 11 July 2017. 
The Action Plan sets out a comprehensive approach that focuses on a mix of complementary 
policy actions in four areas: (i) bank supervision and regulation, (ii) reform of restructuring, 
insolvency  and  debt  recovery  frameworks,  (iii) developing  secondary  markets  for  distressed 
assets, and (iv) fostering restructuring of the banking system. Actions in these areas are to be 
taken  at  national  level  and  at  Union  level,  where  appropriate.  Some  measures  will  have  a 
stronger  impact  on  banks'  risk  assessment  at  loan  origination,  while  others  will  foster  swift 
recognition  and  better  management  of  NPLs,  and  further  measures  will  enhance  the  market 
value  of  such  NPLs.  These  measures  mutually  reinforce  each  other  and  would  not  be 
sufficiently effective if implemented in isolation. 

This proposal, together with the other measures the Commission is putting forward, as well as 
the  action  taken  by  the  Single  Supervisory  Mechanism  (SSM)  and  the  European  Banking 
Authority (EBA) are key parts of this effort. In combining several complementary measures, 
the  Commission  helps  create  the  appropriate  environment  for  banks  to  deal  with  NPLs  on 
their balance sheets, and to reduce the risk of future NPL accumulation. 

Banks  will  be  required  to  put  aside  sufficient  resources  when  new  loans  become  non- 
performing,  creating appropriate incentives to address NPLs at an early stage and avoid too 
large accumulation of NPLs. 

If  loans  become  non-performing,  more  efficient  enforcement  mechanisms  for  secured  loans 
will allow banks to address NPLs, subject to appropriate safeguards for debtors.  

Should NPL stocks nevertheless become too high – as it is currently the case for some banks 
and  some  Member  States  –  banks  will  be  able  to  sell  them  in  efficient,  competitive  and 

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5 

Communication  by  the  European  Commission  to  the  European  Parliament,  the  European  Council,  the 
Council, the European Social and Economic Committee and the Committee of the Regions: Completing the 
Capital Markets Union by 2019 - Time to accelerate delivery, COM(2018) 114. 
The Commission has consistently mentioned this matter, for the Member States concerned, in the context 
of the European Semester. 

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transparent secondary markets to other operators. Supervisors will guide them in this, based 
on  their  existing  bank-specific,  so-called  Pillar  2  powers  under  the  Capital  Requirements 
Directive (CRD)6. Where NPLs have become a significant and broad-based problem, Member 
States  can  set  up  national  asset  management  companies  or  other  measures  within  the 
framework of current state aid and banks resolution rules.    

This proposal provides for a statutory prudential backstop against any excessive future build-
up  of  NPLs  without  sufficient  loss  coverage  on  banks'  balance  sheets.  This  measure  is 
complementary to a number of other measures presented today as set out in the Commission 
Communication  "Second  Progress  report  on  the  reduction  in  Non-Performing  Loans  in 
Europe"7.  In  order  to  help  banks  to  better  manage  NPLs,  the  Commission  also  issues  a 
separate proposal that (i) enhances the protection of secured creditors by allowing them more 
efficient methods of recovering their money from secured loans to business borrowers, out of 
court,  and  (ii)  removes  undue  impediments  to  credit  servicing  by  third  parties  and  to  the 
transfer of credits in order to further develop secondary markets for NPLs. Member States are 
also  provided  with  guidance  on  how  they  can  set  up,  where  appropriate,  national  asset 
management companies (AMCs) in full compliance with EU banking and State aid rules. The 
AMC Blueprint provides practical recommendations for the design and set-up of AMCs at the 
national level, building on best practices from past experiences in Member States8.  

These initiatives mutually reinforce each other. The statutory prudential backstop ensures that 
credit losses on future NPLs are sufficiently covered, making their resolution or sale easier. 
The AMC blueprint assists Member States that so wish in the restructuring of their banks by 
means of the establishment of asset management companies dealing with NPLs. These effects 
are complemented by the push to further develop secondary markets for NPLs as these would 
make  demand  for  NPLs  more  competitive  and  raise  their  market  value.  Furthermore, 
accelerated  collateral  enforcement  as  a  swift  mechanism  for  recovery  of  collateral  value 
reduces the costs for resolving NPLs. 

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Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013, OJ L 176, p. 338. 
Communication from the Commission to the European Parliament, the Council and the European Central 
Bank  -  second  progress report  on  the reduction of  non-performing  loans in  Europe, insert  COM Number 
once available. 
insert SWD Number once available. 

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• 

Consistency with existing policy provisions in the policy area 

Provisions  have  to  be  made  for  NPEs  in  accordance  with  the  applicable  accounting 
framework. The new International Financial Reporting Standard (IFRS) 9, which has applied 
in  the  EU  since  1  January  2018,  is  expected  to  help  address  the  issue  of  delayed  and 
insufficient provisions, as it operates on an 'expected loss' basis. However, the new standard 
introduces  only  limited  changes  with  regard  to  financial  assets  that  have  become  non-
performing. Furthermore, accounting standards, including IFRS 9, set general principles and 
approaches  for  determining  credit  loss  provisions,  rather  than  detailed  rules.  Despite  the 
available guidance on their application, accounting standards generally leave discretion with 
regard  to  the  determination  of  expected  credit  losses  on  performing  and  non-performing 
exposures, inter alia as regards estimated future cash flows from collateral or guarantees and 
consequently, in the determination of provision levels. 

Under the Pillar 2 of the prudential framework established in the CRD, competent authorities 
(i.e.  the  supervisor)  may  influence  an  institution’s  provisioning  policy  and  require  specific 
adjustments to own funds calculations on a case-by-case basis.9 Pillar 2 measures are applied 
at the discretion of the competent authority and case-by-case, following an assessment that the 
institution's  provisioning  policy  is  inadequate  or  insufficiently  prudent  from  a  supervisory 
point of view. 

In  conclusion,  losses  on  credit  exposures  (including  NPEs)  are  subject  to  both  accounting 
standards  and  prudential  regulation.  However,  neither  the  accounting  nor  the  prudential 
framework currently provides for common minimum treatment that would effectively prevent 
the build-up of insufficiently covered NPEs. 

In  its  Action  Plan  the  Council  invited  the  Commission  "to  consider  prudential  backstops 
addressing potential under-provisioning which would apply to newly originated loans. These 
statutory backstops could take the shape of compulsory prudential deductions from own funds 
of  NPEs,  following  an  assessment  of  the  most  appropriate  calibrations  in  line  with 
international practice". 

Insufficiently  provisioned  NPEs  are  more  likely  to  remain  on  banks’  balance  sheets  in  an 
attempt  by  banks  to  avoid  or  delay  loss  recognition  ('wait-and-see'  approach).  Under-
provisioning  and  loss  forbearance  are  major  obstacles  to  debt  restructuring  and  asset  sales, 
since  banks  may  postpone  restructuring  or  deleverage  in  order  to  avoid  loss  recognition. 
Delays in loss recognition have been found to contribute to reduced lending, as they put even 
more pressure on banks to increase provisions in times of stress (i.e. when losses materialise 
and regulatory own funds requirements become most binding).  

In  response  to  the  ECOFIN  Council's  request,  the  Commission  conducted  a  targeted 
consultation  and  an  impact  assessment,  concluding  that  the  introduction  of  prudential 
minimum  treatment  acting  as  a  statutory  backstop  for  newly  originated  exposures  that 
subsequently  turn  non-performing  is  appropriate  to  prevent  the  build-up  of  NPEs  in  future. 
The proposed amendments to the Capital Requirements Regulation (CRR)10, which is directly 

9 

The  Commission  clarified  the  scope  of  this  power  in  its  report  reviewing  the  functioning  of  the  Single 
Supervisory Mechanism (SSM), COM(2017) 591 final. 

10  Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential  requirements  for  credit  institutions  and  investment  firms  and  amending  Regulation  (EU)  No 
648/2012, OJ L 176, 27.6.2013, p.1. 

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applicable to all institutions in the EU, established a framework for a prudential backstop for 
newly  originated  exposures  that  become  non-performing,  in  the  form  of  time-bound 
prudential deductions from own funds. This backstop aims to: 

 

 

reduce  financial  stability  risks  arising  from  high  levels  of  insufficiently  covered 
NPEs, by avoiding the build-up or increase of such NPEs with spill-over potential in 
stressed market conditions; and 

ensure that institutions have sufficient loss coverage for NPEs, hence protecting their 
profitability, capital  and funding costs in times  of stress. In turn, this  would ensure 
that stable, less pro-cyclical financing is available to households and businesses. 

It  would  complement  (i)  the  application  of  accounting  standards  with  regard  to  loan-loss 
provisioning for NPEs, and (ii) the use of existing Pillar 2 supervisory powers following case-
by-case assessment by the competent authority. 

Hence, institutions will have to continue to recognise provisions in line with their assessment 
and applicable accounting standards. Those provisions, including potential increases because 
of IFRS 9, will be taken fully into account for the purposes of the prudential backstop. Where 
the  sum  of  provisions  and  other  adjustments  do  not  suffice  to  cover  losses  on  NPEs  up  to 
common minimum levels, the prudential backstop would apply and require deduction of the 
difference from Common Equity Tier 1 (CET1) items. Where competent authorities ascertain 
on a case-by-case basis that, despite the application of the prudential backstop for NPEs under 
this Regulation, the NPEs of a specific institution are not sufficiently covered, they may make 
use of their supervisory powers under Pillar 2. 

With  a  view  to  ensuring  consistency  in  the  prudential  framework,  the  proposed  Pillar  1 
treatment  is  based  on  definitions  and  concepts  already  used  for  the  purposes  of  supervisory 
reporting.  The  concept  of  NPE  introduced  via  this  amendment,  like  the  criteria  relating  to 
forbearance,  is  consistent  with  that  in  Commission  Implementing  Regulation  (EU)  No 
680/201411, which is already commonly applied for supervisory reporting purposes.  

Where necessary for the sake of consistency, amendments to relevant provisions in the CRR 
are also proposed. 

• 

Consistency with other Union policies 

More than five years after the European Heads of State and Governments agreed to create a 
Banking Union, two of its pillars – single supervision and resolution – are in place, resting on 
the  solid  foundation  of  a  single  rulebook  for  all  institutions  in  the  EU.  While  significant 
progress has been made, further steps are needed to complete the Banking Union, including 
the  creation  of  a  single  deposit  guarantee  scheme,  as  set  out  in  the  October  2017 
Communication and the December 2017 roadmap. 

In  addition  to  the  comprehensive  package  of  reforms  proposed  by  the  Commission  in 
November 2016 ("Banking reform package"), the proposed prudential backstop is one of the 
risk-reducing  measures needed to  strengthen  the  resilience  of  the  banking  sector,  in  parallel 
with  the  staged  introduction  of  the  European  Deposit  Insurance  Scheme  (EDIS).  These 
measures aim at the same time to ensure a continued single rulebook for all institutions in the 

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Commission Implementing Regulation (EU) No 680/2014 of 16 April 2014 laying down implementing 
technical  standards  with  regard  to  supervisory  reporting  of  institutions  according  to  Regulation  (EU) 
No 575/2013 of the European Parliament and of the Council (OJ L 191, 28.6.2014, p. 1). 

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EU, whether inside or outside the Banking Union. The overall objectives of this initiative, as 
described  above,  are  fully  consistent  and  coherent  with  the  EU's  fundamental  goals  of 
promoting financial stability, reducing the likelihood and extent of taxpayers' support where 
an  institution  is  resolved  and  contributing  to  the  harmonious  and  sustainable  financing  of 
economic  activity,  which  is  conducive  to  a  high  level  of  competitiveness  and  consumer 
protection. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

The legal basis for the proposed amendments is the same as that for the legislative act being 
amended, i.e. Article 114 TFEU. 

• 

Subsidiarity (for non-exclusive competence)  

The current EU prudential framework does not provide for harmonised prudential treatment 
as regards NPEs. As a consequence, actual loss coverage for NPEs may vary across banks in 
different jurisdictions, even if  they bear the same  underlying risk. This  may limit the cross-
country  comparability of  capital ratios  and  undermine  their  reliability. Banks  with  the  same 
risk profile and sharing the same currency would face different funding conditions depending 
on  where  they  are  located  in  the  Union.  This  creates  additional  financial  fragmentation  that 
hampers one of the most important benefits of the internal market, namely the diversification 
and sharing of economic risks across borders.  

However,  Member  States  have  only  limited  scope  to  introduce  generally  applicable  and 
legally  binding  provisioning  requirements.  The  specification  of  IFRSs,  for  instance,  is  the 
responsibility of the International Accounting Standards Board (IASB). As regards prudential 
treatment,  minimum  requirements  that  are  directly  applicable  to  institutions  (including  for 
NPEs, such as deductions from own funds) are subject to maximum harmonisation throughout 
the internal market. 

Competent  authorities  in  charge  of  supervising  institutions  in  the  EU  have  the  power  to 
influence  institutions’  provisioning  policy  and  to  require  specific  adjustments  to  own  funds 
calculations  case  by  case  under  Pillar  2  of  the  framework,  taking  into  account  the  specific 
situation  of  the  institution.  However,  they  cannot  impose  harmonised  (minimum)  treatment 
across Member States and institutions, nor effectively address on a systematic and EU-wide 
basis the potential under-provisioning for NPEs. 

The  objective  of  the  proposed  measures  is  to  supplement  existing  EU  legislation;  This  can 
best be achieved at EU level, rather than through different national or supervisory measures. 
Legislative  action  at  EU  level  will  lead  to  harmonised  treatment  requiring  all  institutions 
established  in  the  EU  to  cater  for  losses  on  newly  originated  exposures  that  turn  non-
performing at a common prudential minimum level. Such a prudential backstop would put an 
automatic  EU-wide  brake  on  the  build-up  of  future  NPEs  without  sufficient  loan-loss 
coverage and thus strengthen banks’ financial soundness and ability to lend. EU-wide action 
will  reduce  potential  spillover  effects  within  the  Union.  It  will  also  help  to  strengthen  risk 
reduction and level the playing field in the internal market by putting all banks on an equal 
footing  with  regard  to  prudential  treatment  for  NPEs,  reducing  unnecessary  differences  in 
banks’  practices,  increasing  comparability,  facilitating  market  discipline  and  promoting 
market confidence. 

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• 

Proportionality 

Proportionality has been an integral part of the impact assessment accompanying the proposal. 
Not  only  have  all  proposed  options  been  individually  assessed  against  the  proportionality 
objective, but also the lack of proportionality of the existing rules has been analysed, with a 
view  to  minimising  administrative  and  compliance  costs  while  ensuring  common  treatment 
throughout the Union.  

The proposal sets out a harmonised treatment of NPEs for prudential purposes so as to ensure 
that all institutions in the EU have a minimum level of coverage for their NPEs-related risks. 
The applicable minimum coverage requirements take into account how long an exposure has 
been classified as non-performing, differentiate between unsecured and secured NPEs as well 
as  between  NPEs  where  the  obligor  is  past  due  more  than  90  days  and  other  NPEs.  The 
proposed  treatment  is  thus  commensurate  with  the  different  risk  characteristics  NPEs  may 
have and, at the same time, still provides for a relatively simple approach that can be easily 
applied across the board. The most proportionate means to ensure a level playing field, reduce 
regulatory complexity and avoid unwarranted compliance costs (particularly for cross-border 
activities), promote further integration in the EU market and contribute to the elimination of 
regulatory  arbitrage  opportunities  is  to  amend  the  existing  Union  rules  on  own  funds 
requirements. 

• 

Choice of the instrument 

It is proposed that the measures be implemented by amending Regulation (EU) No 575/2013, 
as they refer to or develop existing provisions in that Regulation, in particular as regards own 
funds calculations.  

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

The  Commission  held  a  targeted  consultation  in  November  2017  to  assess  whether  it  was 
appropriate to introduce a prudential backstop to tackle under-provisioning for NPEs.  

The  objective  was  to  collect  private  and  public  stakeholders’  views  on  the  feasibility  of  a 
prudential backstop, its possible design and possible unintended consequences. The questions 
covered  all  three  policy  options  analysed  in  the  impact  assessment  that  followed  the 
consultation.  

The  consultation  was  open  to  all  interested  parties.  Most  responses  were  from  banks  or 
banking associations and a few came from supervisors. In total, 38 responses were received: 
29  from  private  stakeholders  (including  one  private  individual)  and  9  from  public 
stakeholders. Most were from respondents in Member States with the highest NPE ratios. 

As regards the design of a prudential backstop, most stakeholders favoured a progressive path 
of deduction, on the basis that it would better recognise early recoveries of loans. This is the 
option followed in the proposal. Some argued in favour of a distinction between NPEs where 
the  obligor  is  still  paying  its  obligations  and  NPEs  where  the  obligor  is  insolvent.  This  has 
been taken up in the proposal. 

Annex 2 to the impact assessment summarises the responses to the consultation.  

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• 

Collection and use of expertise 

The  Commission  asked  for  input  from  the  European  Banking  authority  (EBA),  which 
responded  in  a  constrained  timeframe  to  a  call  for  advice  on  the  impact  of  a  possible 
prudential backstop. The EBA estimates were included in the impact assessment. 

Impact assessment 

• 
The  impact  assessment12  was  discussed  with  the  Regulatory  Scrutiny  Board  and  approved 
without  reservations  on  17  January  201813.  The  proposal  is  accompanied  by  the  impact 
assessment and remains consistent with it.  

The  impact  assessment  describes  the  baseline  scenario  and  compares  it  with  three  possible 
options  for  the  introduction  of  a  prudential  backstop  taking  into  account  all  relevant 
assumptions.  The  baseline  takes  into  account  the  current  state  of  play  regarding  the 
provisioning of NPEs, i.e. the application of the new rules in line with IFRS 9 and the existing 
supervisory powers of competent authorities to increase provisioning for NPEs. Two options 
were designed as a prudential deduction from own funds in case of insufficient provisioning, 
using  either  an  end-of-period  approach  or  a  gradual  path  (which  could  be  linear  or 
progressive).  The  third option  was designed as  a  haircut  approach  for secured  NPEs,  where 
the specific type of credit protection used to secure the NPE would be taken into account in 
the calculation of the backstop. Following the analysis in the impact assessment, the preferred 
option  is  a  gradual  deduction  approach  following  a  progressive  path.  As  compared  with  an 
end-of-period approach, this avoids a significant cliff-edge effect. It also better enables banks 
to enforce credit protection or recover loans in the first few years, as compared with a linear 
path of deduction. Finally, it is seen as being less complex and operationally burdensome than 
an option based on a haircut approach.  

As  shown  in  the  impact  assessment,  the  costs  to  be  expected  from  the  introduction  of  a 
prudential backstop for under-provisioned NPEs can be considered manageable. According to 
EBA  estimates,  the  cumulative  decrease  in  the  median  EU  bank’s  CET1  ratio  due  to  the 
introduction  of  a  prudential  backstop  (similar  to  that  envisaged)  amounts  to  approximately 
138 basis points after twenty years. However, this result still represents the upper bound for 
the  potential  impact  of  the  proposed  measure,  as  the  underlying  assumptions  are  quite 
conservative  (see  impact  assessment),  and  the  effects  of  a  softer  calibration  applying  to 
specific cases of unlikely-to-pay NPEs are not factored in.  

The impact assessment report has been amended slightly in line with the recommendations in 
the  Regulatory  Scrutiny  Board’s  opinion.  The  common  introduction  to  the  three  reports  on 
NPEs  has  been  expanded  to  explain  better  the  synergies  between  the  three.  Additional 
justifications  of the need for action at EU level have  been included and the report has  been 
changed to reflect better the impact of existing measures such as IFRS 9 and Pillar 2 powers. 
Updated  EBA  estimates  have  been  inserted,  alongside  more  developed  explanations  of  the 
results and assumptions used. Finally, the quantification tables have been adjusted in line with 
the updated estimates and to strengthen the quantification of the macroeconomic impacts of 
the preferred option. 

12 
13 

Insert link to the IA. 
Insert link to the positive opinion. 

EN 

8 

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• 

Regulatory fitness and simplification 

This initiative introduces a new tool (minimum coverage requirements for incurred/expected 
losses on NPEs) that adds to existing legislation by introducing new prudential treatment and 
integrating existing definitions. It improves the efficiency of existing legislation by ensuring a 
standardised minimum level of coverage rules across the Union. It should be pointed out that 
other current and past initiatives relating to NPEs will also impact NPE levels, so it is hard to 
disentangle  the  efficiency  gains  from  each  individual  measure  (see  Annex  3  to  the  impact 
assessment for details). 

By strengthening banks’ balance sheets with more timely and effective management of NPEs, 
a prudential backstop for insufficiently provisioned NPEs will support a more stable supply of 
credit in the future. The positive impact should be particularly to the benefit of SMEs, which 
are more dependent on bank lending than large corporates. 

• 

Fundamental rights 

The EU is committed to high standards of protection of fundamental rights and is signatory to 
a  broad  set  of  conventions  on  human  rights.  In  this  context,  the  proposal  respects  the 
fundamental  rights  and  observes  the  principles  recognised  by  the  Charter  of  Fundamental 
Rights  of  the  European  Union,  in  particular  the  freedom  to  conduct  a  business,  the  right  to 
property, the right to a fair trial, the protection of personal data and consumer protection.   

4. 

BUDGETARY IMPLICATIONS 

The proposal does not have implications for the Union budget. 

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

As  this  proposal  will  introduce  modifications  to  the  own  funds  calculations  set  forth  in  the 
CRR, its evaluation will be performed as part of the monitoring of that Regulation. 

• 

Detailed explanation of the specific provisions of the proposal 

Definition of NPE – proposed Article 47a: 

For  the  purposes  of  the  prudential  backstop,  a  definition  of  NPE  is  introduced  in  the  CRR. 
This  definition  is  based  on  the  concept  of  NPE  set  forth  by  Commission  Implementing 
Regulation (EU) No 680/2014, which is already commonly applied for supervisory reporting 
purposes.  This  definition  includes,  among  others,  defaulted  exposures  as  defined  for  the 
purposes  of  calculating  own  funds  requirements  for  credit  risk  and  exposures  impaired 
pursuant  to  the  applicable  accounting  framework.  Moreover,  and  also  in  line  with 
Commission  Implementing  Regulation  (EU)  No  680/2014,  the  proposed  amendments 
introduce strict criteria on the conditions to discontinue the treatment of an exposure as non-
performing  as  well  as  on  the  regulatory  consequences  of  refinancing  and  other  forbearance 
actions. 

General principle of the prudential backstop – proposed Articles 36(1)(m) and 47c: 

The  prudential  backstop  consists  of  two  main  elements:  (i)  a  requirement  for  institutions  to 
cover  up  to  common  minimum  levels  the  incurred  and  expected  losses  on  newly  originated 
loans  once  such  loans  become  non-performing  ('minimum  coverage  requirement'),  and  (ii) 

EN 

9 

  EN 

 
where the minimum coverage requirement is not met, a deduction of the difference between 
the level of the actual coverage and the minimum coverage from CET1 items.  

The minimum coverage requirement increases gradually depending on how long an exposure 
has  been  classified  as  non-performing.  The  annual  increase  of  the  minimum  coverage 
requirement  is  lower  during  the  first  years  after  the  classification  of  an  exposure  as  non-
performing. This gradual increase reflects the fact that the longer an exposure has been non-
performing, the lower is the probability to recover the amounts due. 

The  following  items  would  be  eligible  for  compliance  with  the  minimum  coverage 
requirements:  

the  applicable  accounting  framework  ('credit  risk 
a)  provisions  recognised  under 
adjustments'), i.e. the amount of specific and general loan loss  provision for credit risks that 
has been recognised in the financial statements of the institution;  

b) additional value adjustments for fair-valued assets;  

c)  other  own  funds  reductions;  for  instance,  institutions  have  the  possibility  to  apply  higher 
deductions from their own funds than required by the regulation; and  

d)  for  institutions  calculating  risk-weighted  assets  (RWAs)  using  the  internal  ratings-based 
(IRB)  approach,  the  regulatory  expected  loss  shortfall  which  is  already  deducted  from  own 
funds.  

Only  where  the  sum  of  the  amounts  listed  under  a)  to  d)  does  not  suffice  to  meet  the 
applicable  minimum  coverage  requirement,  the  prudential  backstop  applies.  The  deduction 
would  ensure  that  the  risks  associated  with  NPEs  are  appropriately  reflected  in  institutions' 
CET1 capital ratios in one way or another. 

Distinction between unsecured and secured NPEs – Article 47c(2) and (3): 

Different  coverage  requirements  apply  depending  on  the  classification  of  the  NPEs  as 
'unsecured'  or  'secured'.  NPEs  or  part  of  NPEs  covered  by  eligible  credit  protection  as 
determined in the CRR are considered as secured. On the other hand, NPEs or parts of NPEs 
which are not covered by eligible credit protection are categorised as unsecured. A loan only 
partly  covered  by  collateral  would  be  considered  as  secured  for  the  covered  part,  and  as 
unsecured for the part which is not covered by collateral.  

In principle, non-performing unsecured credit exposures and non-performing credit exposures 
secured  by  collateral  could  be  treated  in  the  same  way.  However,  both  types  of  exposures 
have  different  characteristics  in  terms  of  risk.  Secured  NPEs  are  in  general  less  risky  for  a 
institution than unsecured NPEs as the credit protection securing the loan gives the lender a 
specific  claim  on  an  asset  or  against  a  third  party  without  reducing  his/her  general  claim 
against  the  defaulted  borrower.  On  the  contrary,  an  institution  has  typically  no  other  viable 
recourse in case an unsecured loan becomes non-performing than to forbear it. Recovery rates 
are  on  average  significantly  higher  for  secured  NPEs  than  for  unsecured  ones.  However,  it 
takes some additional time to enforce the credit protection and, where applicable, realise the 
collateral.  Unsecured  NPEs  should  therefore  require  higher  and  timelier  minimum  loss 
coverage by the creditor bank than secured NPEs. However, after a certain number of years 
without  being  successfully  enforced  (i.e.  the  collateral/guarantee  could  not  be  realised),  the 
credit protection should not be seen as effective anymore. In such case, also full coverage of 

EN 

10 

  EN 

 
the  exposure  amount  of  secured  NPEs  is  deemed  necessary.  Timely  resolution  of  secured 
NPEs  should  be  facilitated  going  forward  by  ongoing  efforts  in  several  Member  States  to 
reform insolvency systems and by the use of accelerated extrajudicial enforcement procedures 
for  collateral,  which  are  envisaged  in  the    Commission  proposal  for  a  Directive  on  credit 
servicers,  credit  purchases  and  collateral  enforcement  adopted  on  the  same  day  as  this 
proposal    .  Banks  using  extrajudicial  enforcement  procedures  tend  to  restructure,  recover  or 
dispose of their NPEs earlier and at a higher rate. They would be less affected by the need to 
increase their loss coverage for NPEs. 

Distinction  between  NPEs  where  the  obligor  is  past  due  more  than  90  days  and  other 
NPEs – Article 47c(2) and (3): 

The  definition  of  NPE  includes  cases  where  the  obligor  is  considered unlikely-to-pay  albeit 
actually still paying its instalments. Since the institution still receives full payment from the 
obligor  without  excessive  delay,  the  credit  risk  is  in  general  expected  to  be  lower  than  for 
exposures where the obligor is past due more than 90 days, and it is justified to apply a less 
strict  calendar  in  such  cases.  Concretely,  NPEs  shall  then  be  covered  up  to  80%  of  the 
exposure value after the defined time period (i.e. after two years for unsecured NPEs and after 
eight years for secured ones). Conversely, in cases where the obligor is past due more than 90 
days  on  any  material  credit  obligation  to  the  institution,  a  full  coverage  level  should  be 
required after the defined time period.  

Derogation for past loans – Article 469a 

The  prudential  backstop  would  apply  only  to  exposures  originated  after  14  March  2018  as 
from  that  date  there  is  sufficient  clarity  how  the  new  rule  would  apply.  In  order  to  avoid 
circumvention of this derogation, exposures originated before the adoption of the proposal but 
that  are  afterwards  amended  by  the  institution  in  a  way  that  increases  its  exposure  value 
should be treated as newly originated exposures. By contrast, exposures originated before the 
date of the adoption of this proposal should be treated accordingly to the rules in force at that 
date, even if they are refinanced or subject to other forbearance measures.  

EN 

11 

  EN 

 
 
2018/0060 (COD) 

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on amending Regulation (EU) No 575/2013 as regards minimum loss coverage for non-
performing exposures  

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 114 thereof, 

Having regard to the proposal from the European Commission, 

After transmission of the draft legislative act to the national parliaments, 
Having regard to the opinion of the European Central Bank14, 
Having regard to the opinion of the European Economic and Social Committee15,  

Acting in accordance with the ordinary legislative procedure, 

Whereas: 

(1) 

(2) 

The establishment of a comprehensive strategy to address the issue of non-performing 
exposures (NPEs) is a priority for the Union. While addressing NPEs is primarily the 
responsibility  of  banks  and  Member  States,  there  is  also  a  clear  Union  dimension  to 
reduce current stocks of NPEs, as well as to prevent any excessive build-up of NPEs in 
the future. Given  the interconnectedness of the banking and financial  systems across 
the Union where  banks  operate in  multiple  jurisdictions  and Member  States,  there is 
significant  potential  for  spill-over  effects  for  Member  States  and  the  Union  at  large, 
both in terms of economic growth and financial stability. 

An integrated financial system will enhance the resilience of the European Monetary 
Union to adverse shocks by facilitating private cross-border risk-sharing, while at the 
same  time  reducing  the  need  for  public  risk-sharing.  In  order  to  achieve  these 
objectives,  the  Union  should  complete  the  Banking  Union  and  further  develop  a 
Capital  Markets  Union.  Addressing  high  stocks  of  NPEs  and  their  possible  future 
accumulation  is  essential  to  completing  the  Banking  Union  as  it  is  essential  for 
ensuring  competition  in  the  banking  sector,  preserving  financial  stability  and 
encouraging lending so as to create jobs and growth within the Union. 

(3) 

In  July  2017  the  Council  in  its  'Action  Plan  to  Tackle  Non-Performing  Loans  in 
Europe' called upon various institutions to take appropriate measures to further address 
the  high  number  of  NPEs  in  the  Union.  The  Action  Plan  sets  out  a  comprehensive 

14  OJ C […], […], p. […]. 
15  OJ C , , p. . 

EN 

12 

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(4) 

(5) 

(6) 

approach that focuses on a mix of complementary policy actions in four areas: (i) bank 
supervision and regulation; (ii) reform of restructuring, insolvency and debt recovery 
frameworks;  (iii)  developing  secondary  markets  for  distressed  assets;  (iv)  fostering 
restructuring of the banking system. Actions in these areas are to be taken at national 
level  and  at  Union  level,  where  appropriate.  The  Commission  announced  a  similar 
intention  in  its  'Communication  on  completing  the  Banking  Union'  of  11  October 
201716, which called for a comprehensive package on tackling NPLs within the Union.  

Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26 
June  201317  forms,  together  with  Directive  2013/36/EU  of  the  European  Parliament 
and  of  the  Council  of  26  June  201318,  the  legal  framework  governing  the  prudential 
rules  for  institutions.  Regulation  (EU)  No  575/2013  contains,  inter  alia,  provisions 
directly  applicable  to  institutions  for  determining  their  own  funds.  It  is  therefore 
necessary  to  complement  the  existing  prudential  rules  in  Regulation  (EU)  No 
575/2013 relating to own-funds with provisions requiring a deduction from own funds 
where  NPEs  are  not  sufficiently  covered  via  provisions  or  other  adjustments.  This 
would  amount  to  effectively  creating  a  prudential  backstop  for  NPEs  that  will  apply 
uniformly to all Union institutions.  

The  prudential  backstop  should  not  prevent  competent  authorities  from  exercising 
their supervisory powers in accordance with Directive 2013/36/EU. Where competent 
authorities  ascertain  on  a  case-by-case  basis  that,  despite  the  application  of  the 
prudential  backstop  for  NPEs  established  in  this  Regulation,  the  NPEs  of  a  specific 
institution are not sufficiently covered, they may make use of the supervisory powers 
envisaged  in  Directive  2013/36/EU,  including  the  power  referred  to  in  Article 
104(1)(d) of that Directive. 

For the purposes of applying the backstop, it is appropriate to introduce in Regulation 
(EU)  No  575/2013  a  clear  set  of  conditions  for  the  classification  of  NPEs.  As 
Commission  Implementing  Regulation  (EU)  No  680/2014  already  lays down  criteria 
concerning  NPEs  for  the  purposes  of  supervisory  reporting,  it  is  appropriate  that  the 
classification of NPEs builds on that existing framework. Commission Implementing 
Regulation  (EU)  No  680/2014  refers  to  defaulted  exposures  as  defined  for  the 
purposes of calculating own funds requirements for credit risk and exposures impaired 
pursuant  to  the  applicable  accounting  framework.  As  forbearance  measures  may 
influence  whether  an  exposure  is  classified  as  non-performing,  the  classification 
criteria  are  complemented  by  clear  criteria  on  the  impact  of  forbearance  measures. 
Forbearance  measures  may  have  different  justifications  and  consequences,  it  is 
therefore  appropriate  to  provide  that  a  forbearance  measure  granted  to  a  non-
performing exposure should not discontinue the classification of that exposure as non-
performing unless certain strict discontinuation criteria are fulfilled. 

COM(2017) 592 final, 11.10.2017. 

16 
17 
Regulation  (EU)  No  575/2013  of  the  European  Parliament  and  of  the  Council  of  26  June  2013  on 
prudential  requirements  for  credit  institutions  and  investment  firms  and  amending  Regulation  (EU)  No 
648/2012, OJ L 176, 27.6.2013, p.1. 
18 
28.6.2014, p. 1. 

Directive  2013/36/EU  of  the  European  Parliament  and  of  the  Council  of  26  June  2013,  OJ  L  191, 

EN 

13 

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(7) 

(8) 

(9) 

The  longer  an  exposure  has  been  non-performing,  the  lower  the  probability  for  the 
recovery of its value. Therefore, the portion of the exposure that should be covered by 
provisions,  other  adjustments  or  deductions  should  increase  with  time,  following  a 
pre-defined calendar. 

Secured NPEs generally entail less risk than unsecured NPEs, as the credit protection 
securing  the  loan  gives  the  institution  a  specific  claim  on  an  asset  or  against  a  third 
party  in  addition  to  the  institution's  general  claim  against  the  defaulted  borrower.  In 
the case of an unsecured loan, only the general claim against the defaulted borrower 
would be available. Given the higher risk of unsecured loans, a stricter calendar should 
be  applied.  An  exposure  which  is  only  partly  covered  by  collateral  should  be 
considered as secured for the covered part, and as unsecured for the part which is not 
covered by collateral. 

A  different  calendar  should  be  applied  depending  on  whether  the  exposure  is  non-
performing  because  the  obligor  is  past  due  more  than  90  days  or  if  it  is  non-
performing  for  other  reasons.  In  the  first  case,  the  minimum  coverage  requirement 
should be higher as the institution has not received any payment from the obligor over 
a long period. In the second case, there should be no full coverage requirement as there 
is still some repayment or a higher probability of repayment. 

(10)  When  an  exposure  is  classified  as  non-performing  for  reasons  other  than  being  past 
due  more  than  90  days  and  subsequently  becomes  past  due  more  than  90  days,  it 
should be subject to the stricter calendar applicable for NPEs being past due more than 
90 days. The new calendar should not be retroactive and should apply from the day the 
exposure  becomes  past  due  more  than  90  days.  However,  the  factor  to  be  applied 
should  be  the  one  which  would  have  been  applicable  if  the  exposure  had,  from  the 
beginning, been classified as NPE because it was past due more than 90 days.  

(11) 

(12) 

In  order  to ensure  that the credit protection valuation of institutions' NPEs  follows a 
prudent  approach,  EBA  should  consider  the  need  for  and,  if  necessary,  develop  a 
common methodology, in particular regarding assumptions pertaining to recoverability 
and enforceability,  and possibly  including minimum requirements for re-valuation in 
terms of timing.  

In order to facilitate a smooth transition towards this new prudential backstop, the new 
rules should not be applied in relation to exposures originated prior to 14 March 2018. 
The  Commission  has  repeatedly  made  public  its  intention  to  introduce  a  prudential 
backstop for NPEs. As of the date of the legislative proposal there should be sufficient 
clarity  for  institutions  and  other  stakeholders  on  how  the  prudential  backstop 
envisaged by the Commission would apply. 

(13)  Regulation (EU) No 575/2013 should therefore be amended accordingly, 

HAVE ADOPTED THIS REGULATION: 

Article 1 

Amendments to Regulation (EU) No 575/2013 

(1) 

in Article 36, the following point (m) is added: 

'(m) the applicable amount of insufficient coverage for non-performing exposures.'; 

(2) 

the following Articles 47a, 47b and 47c are inserted: 

EN 

14 

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'Article 47a 

Non-performing exposures 

1. 

For  the  purposes  of  Article  36(1)(m),  'exposure'  shall  include  any  of  the  following 
items, provided they are not included in the trading book of the institution: 

(a) 

(b) 

a debt instrument, including a debt security, a loan, an advance, a cash balance 
at a central bank and any other demand deposit; 

a loan commitment given, a financial guarantee given or any other commitment 
given, irrespective whether revocable or irrevocable. 

2. 

For the purposes of Article 36(1)(m), the exposure value of a debt instrument shall be 
its  accounting  value  measured  without  taking  into  account  any  specific  credit  risk 
adjustments,  additional  value  adjustments  in  accordance  with  Articles  34  and  105, 
amounts deducted in accordance with Article 36(1)(m) or other own funds reductions 
related to the exposure. 

For  the  purposes  of  Article  36(1)(m),  the  exposure  value  of  a  loan  commitment 
given, a financial guarantee given or other commitments given shall be its nominal 
value,  which  shall  represent  the  institution’s  maximum  exposure  to  credit  risk 
without taking account of any funded or unfunded credit protection. In particular,  

(a) 

(b) 

the nominal value of financial guarantees given shall be the maximum amount 
the entity could have to pay if the guarantee is called on;  

the nominal value of loan commitments shall be the undrawn amount that the 
institution has committed to lend.  

The nominal value referred to in the second subparagraph shall not take into account 
any specific credit risk adjustment, additional value adjustments in accordance with 
Articles 34 and 105, amounts deducted in accordance with Article 36(1)(m) or other 
own funds reductions related to the exposure. 

3. 

For the purposes of Article 36(1)(m), the following exposures shall be classified as 
non-performing: 

(a) 

(b) 

(c) 

(d) 

(e) 

an  exposure  in  respect  of  which  a  default  is  considered  to  have  occurred  in 
accordance with Article 178; 

an exposure considered impaired in accordance with the applicable accounting 
framework; 

an  exposure  under  probation  pursuant  to  paragraph  7,  where  additional 
forbearance measures are granted or where it becomes more than 30 days past 
due; 

an  exposure  in  form  of  a  commitment  that,  were  it  drawn  down  or  otherwise 
used, would present a risk of not being paid back in full without realisation of 
collateral; 

an exposure in form of a financial guarantee that is at risk of being called by 
the  guaranteed  party,  including  where  the  underlying  guaranteed  exposure 
meets the criteria to be considered as non-performing.  

For the purpose of point (a), where an institution has on-balance sheet exposures to 
an obligor that are past due by more than 90 days and that represent more than 20% 
of  all  on-balance  sheet  exposures  to  that  obligor,  all  on-  and  off-balance  sheet 
exposures to that obligor shall be considered as past due by more than 90 days. 

EN 

15 

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4. 

Exposures  that  have  not  been  subject  to  a  forbearance  measure  shall  cease  to  be 
classified  as  non-performing  for  the  purposes  of  Article  36(1)(m)  where  all  of  the 
following conditions are met: 

5. 

6. 

(a) 

the  exposure  meets  the  exit  criteria  applied  by  the  institution  for  the 
discontinuation  of  the  classification  as  impaired  in  accordance  with  the 
applicable  accounting  framework  and  of  the  classification  as  defaulted  in 
accordance with Article 178; 

(b) 

the  situation  of  the  obligor  has  improved  to  the  extent  that  the  institution  is 
satisfied that full and timely repayment is likely to be made; 

(c) 

the obligor does not have any amount past-due by more than 90 days. 

The classification of a non-performing exposure as non-current asset held for sale in 
accordance  with  the  applicable  accounting  framework  shall  not  discontinue  its 
classification as non-performing exposure for the purposes of Article 36(1)(m). 

Non-performing  exposures  subject  to  forbearance  measures  shall  cease  to  be 
classified  as  non-performing  for  the  purposes  of  Article  36(1)(m),  where  all  of  the 
following conditions are met: 

(a) 

(b) 

(c) 

exposures have ceased to be in a situation that would lead to their classification 
as non-performing under paragraph 3; 

at  least  one  year  has  passed  since  the  latest  between  the  moment  where  the 
forbearance  measures  have  been  granted  and  the  moment  where  exposures 
have been classified as non-performing; 

there  is  no  past-due  amount  following  the  forbearance  measures  or  the 
institution,  on  the  basis  of  the  analysis  of  the  obligor’s  financial  situation,  is 
satisfied about the likelihood of the full and timely repayment of the exposure.  

For  the  purposes  of  point  (c),  full  and  timely  repayment  may  be  considered  likely 
where  the  obligor  has  executed  regular  and  timely  payments  of  amounts  equal  to 
either of the following: 

(i) 

(ii) 

the  amount  that  was  past-due  before  the  forbearance  measure  was 
granted, where there were past-due amounts;  

the  amount  that  has  been  written-off  under  the  forbearance  measures 
granted, where there were no past-due amounts. 

7. 

Where  a  non-performing  exposure  has  ceased  being  classified  as  non-performing 
pursuant  to  paragraph  6,  such  exposure  shall  be  under  probation  until  all  of  the 
following conditions are met: 

(a) 

(b) 

at  least  two  years  have  passed  since  the  date  the  forborne  exposure  was  re-
classified as performing; 

regular and timely payments have been made during at least half of the period 
that  the  exposure  would  be  under  probation,  leading  to  the  payment  of  a 
substantial aggregate amount of principal or interest; 

(c)  none of the exposures to the obligor is more than 30 days past due. 

EN 

16 

  EN 

 
Article 47b  
Forbearance measures 

1. 

For the purposes of Article 47a, 'forbearance measure' shall include a concession by 
an  institution  towards  an  obligor  that  is  experiencing  or  is  likely  to  experience  a 
deterioration in its financial situation. A concession may entail a loss for the lender 
and shall refer to either of the following actions: 

(a) 

(b) 

a  modification  of  the  terms  and  conditions  of  a  debt  obligation,  where  such 
modification  would  not  have  been  granted  had  the  financial  situation  of  the 
obligor not deteriorated; 

a total or partial refinancing of a debt obligation, where such refinancing would 
not  have  been  granted  had  the  financial  situation  of  the  obligor  not 
deteriorated. 

2. 

For the purpose of paragraph 1, at least the following situations shall be considered 
forbearance measures:  

(a)  new  contract  terms  that  are  more  favourable  to  the  obligor  than  the  previous 

contract terms;  

(b)  new contract terms that are more favourable to the obligor than contract terms 
offered  by  the  same  institution  to  obligors  with  a  similar  risk  profile  at  that 
time;  

(c) 

(d) 

(e) 

(f) 

the exposure under the initial contract terms was classified as non-performing 
before the modification to the contract terms or would have been classified as 
non-performing in the absence of modification to the contract terms;  

the measure results in a total or partial cancellation of the debt obligation; 

the  institution  approves  the  exercise  of  clauses  that  enable  the  obligor  to 
modify  the  terms  of  the  contract  and  the  exposure  was  classified  as  non-
performing before the exercise of those clauses, or would be classified as non-
performing were those clauses not exercised; 

at  or  close  to  the  time  of  the  granting  of  debt  the  obligor  made  payments  of 
principal or interest on another debt obligation with the same institution, which 
was classified as a non-performing exposure or would have been classified as 
non-performing in the absence of those payments;  

(g) 

the  modification  to  the  contract  terms  involves  repayments  made  by  taking 
possession of collateral, where such modification constitutes a concession. 

3. 

For  the  purpose  of  paragraph  1,  the  following  circumstances  are  indicators  that 
forbearance measures may have been adopted:  

(a) 

(b) 

the initial contract was past due by more than 30 days at least once during the 
three months prior to its modification or would be more than 30 days past due 
without modification; 

at  or  close  to  the  time  of  concluding  the  credit  agreement,  the  obligor  made 
payments  of  principal  or  interest  on  another  debt  obligation  with  the  same 
institution that was past due by 30 days at least once during the three months 
prior to the granting of new debt; 

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4. 

1. 

(c) 

the  institution  approves  the  exercise  of  clauses  that  enable  the  obligor  to 
change the terms of the contract, and the exposure is 30 days past due or would 
be 30 days past due were those clauses not exercised. 

For  the  purposes  of  this  Article,  the  deterioration  of  the  financial  situation  of  an 
obligor shall be assessed at obligor level, taking into account all the legal entities in 
the obligor's group which are within the perimeter of the accounting consolidation of 
the group and natural persons who control that group.  

Article 47c 
Deduction for non-performing exposures  

For  the  purposes  of  Article  36(1)(m),  institutions  shall  determine  the  applicable 
amount  of insufficient  coverage  for non-performing exposures  to  be  deducted from 
Common Equity Tier 1 items by subtracting the amount determined in point (b) from 
the amount determined in point (a): 

(a) 

the sum of: 

(i) 

(ii) 

the  unsecured  part  of  each  non-performing  exposure,  if  any,  multiplied 
by the applicable factor referred to in paragraph 2; 

the secured part of each non-performing exposure, if any, multiplied by 
the applicable factor referred to in paragraph 3;  

(b) 

the  sum  of  the  following  items  provided  they  relate  to  a  specific  non-
performing exposure: 

(i) 

specific credit risk adjustments;  

(ii) 

additional value adjustments in accordance with Articles 34 and 105; 

(iii)  other own funds reductions;  

(iv)  for  institutions  calculating  risk-weighted  exposure  amounts  using  the 
Internal  Ratings  Based  Approach,  the  absolute  value  of  the  amounts 
deducted  pursuant  to  point  (d)  of  Article  36(1)  which  relate  to  non-
performing exposures, where the absolute value attributable to each non-
performing exposure is determined by multiplying the amounts deducted 
pursuant to point (d) of Article 36(1) by the contribution of the expected 
loss  amount  for  the  non-performing  exposure  to  total  expected  loss 
amounts for defaulted or non-defaulted exposures, as applicable. 

The secured part of a non-performing exposure is the part of such exposure which is 
covered  by  a  funded  credit  protection  or  unfunded  credit  protection  in  accordance 
with Chapters 3 and 4 of Title II.  

The  unsecured  part  of  a  non-performing  exposure  corresponds  to  the  difference,  if 
any,  between  the  value  of  the  exposure  as  referred  to  in  Article  47a(1)  and  the 
secured part of the exposure, if any.  

2. 

For the purposes of paragraph 1(a)(i), the following factors shall apply: 

(a)  0.35 for the unsecured part of a non-performing exposure to be applied during 
the period between one year and two years following its classification as non-
performing, where the obligor is past due more than 90 days; 

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(b)  0.28 for the unsecured part of a non-performing exposure to be applied during 
the period between one year and two years following its classification as non-
performing, where the obligor is not past due more than 90 days; 

(c)  1 for the unsecured part of a non-performing exposure to be applied as of the 
first  day  of  the  second  year  following  its  classification  as  non-performing, 
where the obligor is past due more than 90 days; 

(d)  0.8 for the unsecured part of a non-performing exposure to be applied as of the 
first  day  of  the  second  year  following  its  classification  as  non-performing, 
where the obligor is not past due more than 90 days; 

3. 

For the purposes of paragraph 1(a)(ii), the following factors shall apply: 

(a)  0.05 for the secured part of a non-performing exposure to be applied during the 
period  between  one  year  and  two  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days; 

(b)  0.04 for the secured part of a non-performing exposure to be applied during the 
period  between  one  year  and  two  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(c)  0.1 for the secured part of a non-performing exposure to be applied during the 
period  between  two  and  three  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days; 

(d)  0.08 for the secured part of a non-performing exposure to be applied during the 
period  between  two  and  three  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(e)  0.175 for the secured part of a non-performing exposure to be applied during 
the  period  between  three  and  four  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days; 

(f) 

0.14 for the secured part of a non-performing exposure to be applied during the 
period  between  three  and  four  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(g)  0.275 for the secured part of a non-performing exposure  to be applied during 
the  period  between  four  and  five  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days; 

(h)  0.22 for the secured part of a non-performing exposure to be applied during the 
period  between  four  and  five  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(i) 

(j) 

0.4 for the secured part of a non-performing exposure to be applied during the 
period  between  five  and  six  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days; 

0.32 for the secured part of a non-performing exposure to be applied during the 
period  between  five  and  six  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(k)  0.55 for the secured part of a non-performing exposure to be applied during the 
period  between  six  and  seven  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days;  

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(l) 

0.44 for the secured part of a non-performing exposure to be applied during the 
period  between  six  and  seven  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(m)  0.75 for the secured part of a non-performing exposure to be applied during the 
period  between  seven  and  eight  years  following  its  classification  as  non-
performing, where the obligor is past due more than 90 days; 

(n)  0.6 for the secured part of a non-performing exposure to be applied during the 
period  between  seven  and  eight  years  following  its  classification  as  non-
performing, where the obligor is not past due more than 90 days; 

(o)  1 for the secured part of a non-performing exposure to be applied as of the first 
day of the eighth year following its classification as non-performing, where the 
obligor is past due more than 90 days; 

(p)  0.8 for the secured  part of a non-performing  exposure to be applied as  of the 
first  day  of  the  eighth  year  following  its  classification  as  non-performing, 
where the obligor is not past due more than 90 days. 

4. 

For  the  purposes  of  determining  the  factor  referred  to  in  paragraphs  2  and  3 
applicable to the secured or unsecured part of an exposure the following rules shall 
apply: 

(a)  where an exposure that has been classified as non-performing for reasons other 
than  being  past  due  more  than  90  days  and  subsequently  becomes  past  due 
more than 90 days, it shall be treated, from the day it becomes past due more 
than  90  days,  as  if  it  had  been  past  due  more  than  90  days  on  the  date  of  its 
classification as non-performing;  

(b) 

(c) 

an  exposure  that  has  been  classified  as  non-performing  because  it  is  past  due 
more  than  90  days  shall  be  treated  as  such  until  it  ceases  to  be  classified  as 
non-performing  in  accordance  with  paragraphs  4  and  6  of  Article  47a, 
regardless of the repayment of past due amounts by the obligor; 

an  exposure  that  has  been  classified  as  non-performing  because  it  is  past  due 
more than 90 days and which subsequently benefits from forbearance measures 
shall still be treated as being past due more than 90 days; 

(d)  whether  an  exposure  is  past  due  more  than  90  days  shall  be  determined  in 

accordance with Article 178.  

EBA  shall  assess  the  range  of  practices  applied  for  the  valuation  of  secured  non-
to  specify  a  common 
performing  exposures  and  may  develop  guidelines 
methodology, including possible minimum requirements for re-valuation in terms of 
timing and ad hoc methods, for the prudential valuation of eligible forms of funded 
and  unfunded  credit  protection,  in  particular  regarding  assumptions  pertaining  to 
their recoverability and enforceability. 

Those  guidelines  shall  be  issued  in  accordance  with  Article  16  of  Regulation  (EU) 
No 1093/2010.'; 

5. 

(3) 

the first sub-paragraph of Article 111(1) is replaced by the following:  

'1. The exposure value of an asset item shall be its accounting value remaining after 
specific  credit  risk  adjustments,  additional  value  adjustments  in  accordance  with 
Articles  34  and  105,  amounts  deducted  in  accordance  with  Article  36(1)(m)  and 
other own funds reductions related to the asset item have been applied. The exposure 

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value of an off-balance sheet item listed in Annex I shall be the following percentage 
of its nominal value after reduction of specific credit risk adjustments and amounts 
deducted in accordance with Article 36(1)(m):'; 

(4) 

paragraph 1 of Article 127 is replaced by the following:  

'1.  The  unsecured  part  of  any  item  where  the  obligor  has  defaulted  in  accordance 
with Article 178, or in the case of retail exposures, the unsecured part of any credit 
facility which has defaulted in accordance with Article 178 shall be assigned a risk 
weight of: 

(a)  150  %,  where  the  sum  of  specific  credit  risk  adjustments  and  of  the  amounts 
deducted  in  accordance  with  Article  36(1)(m)  are  less  than  20  %  of  the 
unsecured  part  of  the  exposure  value  if  these  specific  credit  risk  adjustments 
and deductions were not applied; 

(b)  100  %,  where  the  sum  of  the  specific  credit  risk  adjustments  and  of  the 
amounts deducted in accordance with Article 36(1)(m) are no less than 20 % of 
the  unsecured  part  of  the  exposure  value  if  these  specific  credit  risk 
adjustments and deductions were not applied.'; 

(5) 

Article 159 is replaced by the following: 

'Article 159 
Treatment of expected loss amounts 

Institutions shall subtract the expected loss amounts calculated in accordance with Article 158 
(5),  (6)  and  (10)  from  the  general  and  specific  credit  risk  adjustments  and  additional  value 
adjustments in accordance with Articles 34 and 110 and other own funds reductions related to 
these  exposures  except  for  the  deductions  made  in  accordance  with  Article  36(1)(m). 
Discounts on balance sheet exposures purchased when in default in accordance with Article 
166(1) shall be treated in the same manner as specific credit risk adjustments. Specific credit 
risk adjustments on exposures in default shall not be used to cover expected loss amounts on 
other  exposures.  Expected  loss  amounts  for  securitised  exposures  and  general  and  specific 
credit risk adjustments related to these exposures shall not be included in this calculation.'; 

(6) 

point (b) of Article 178(1) is replaced by the following:  

'(b) the obligor is past due more than 90 days on any material credit obligation to the 
institution,  the  parent  undertaking  or  any  of  its  subsidiaries.  Competent  authorities 
may replace the 90 days with 180 days for exposures secured by residential property 
or  SME  commercial  immovable  property  in  the  retail  exposure  class,  as  well  as 
exposures to public sector entities. The 180 days shall not apply for the purposes of 
Article 36(1)(m) or Article 127.'; 

(7) 

the following Article 469a is inserted: 

'Article 469a 
Derogation from deductions from Common Equity Tier 1 items for non-performing exposures 

By  way  of  derogation  from  Article  36(1)(m),  institutions  shall  not  deduct  from  Common 
Equity  Tier  1  items  the  applicable  amount  of  insufficient  coverage  for  non  performing 
exposures where the exposure was incurred prior to 14 March 2018.  

Where the terms and conditions of an exposure which was incurred prior to 14 March 2018 
are modified by the institution in a way that increases the institution's exposure to the obligor, 

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the exposure shall be considered as having been incurred on the date when the modification 
applies and shall cease to be subject to the derogation provided in the first subparagraph.'.  

Article 2 

Entry into force 

This  Regulation  shall  enter  into  force  on  the  day  following  that  of  its  publication  in  the 
Official Journal of the European Union. 

This Regulation shall be binding in its entirety and directly applicable in all Member States. 

Done at Brussels, 

For the European Parliament 
The President 

For the Council 
The President 

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