COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Second Progress Report on the Reduction of Non-Performing Loans in Europe
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, credit policy, economic recession, euro area, financial solvency, loan

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 14.3.2018 COM(2018) 133 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL AND THE EUROPEAN CENTRAL BANK  Second Progress Report on the Reduction of Non-Performing Loans in Europe  {SWD(2018) 72 final}  
 
 
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL AND THE 
EUROPEAN CENTRAL BANK 

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

1.  INTRODUCTION  

As  the  European  Union  and  its  economy  are  visibly  regaining  strength,  the  EU  must 
continue  to  seize  the  momentum  to  reinforce  its  Economic  and  Monetary  Union  (EMU). 
Within the context of the roadmap set out by the Commission on 6 December 2017 for the 
deepening  of  Europe's  Economic  and  Monetary  Union1,  and  in  line  with  the  Leaders’ 
Agenda2, one of the most immediate priorities is to complete the Banking Union and put in 
place all building blocks for a Capital Markets Union.3 An integrated financial system will 
enhance  the  EMU’s  resilience  to  adverse  shocks  by  enabling  private  risk-sharing  across 
borders, while reducing the need for public risk-sharing. 

In parallel, the Commission's Communication of 11 October 20174 sets out a way forward to 
complete the Banking Union by promoting risk reduction and risk sharing in parallel, based 
on the Council Roadmap of June 2016.5 

Risk  reduction  measures  taken  since  the  financial  crisis  have  resulted  in  a  significant 
improvement  in  banks’  solvency,  leverage  and  liquidity  positions,  as  mentioned  in  the 
Commission’s First Progress Report on the Reduction of Non-Performing Loans (NPLs) in 
Europe, published on 18 January 2018.6 In addition to the progress on these key risk metrics 
in virtually all Member States, greater convergence towards an improving average of these 
indicators can be observed across Member States. This development is driven in particular 
by marked improvements in those national banking systems most affected by the crisis and 
ensuing  economic  recession.  The  Tier  1  capital  ratios  of  euro  area  banks  have  improved 
across the sample of the European Central Bank (ECB) from 14.6% in Q3 2016 to 15.3% in 
Q3 2017.  The  strengthening  in  capital  positions  of  euro  area  banks  is  also  visible  in  their 
strengthened leverage ratios. The average leverage ratio7 increased further from 5% in Q3 
2016 to 5.2% in Q3 2017. Euro area banks also improved their resilience to liquidity shocks, 
as the liquidity coverage ratio increased from 138% in Q3 2016 to 140% in Q3 2017. As a 
result  of  determined  action  on  risk  reduction,  remaining  risks  have  been  more  effectively 
and evenly addressed in the euro area today than three years ago. 

1 COM(2017) 821. 
2  http://www.consilium.europa.eu/media/21594/leaders-agenda.pdf. 
3  The Commission  issued a Communication [COM(2018)] on 7 March entitled  "Completing the Capital Markets 

Union by 2019 – Time to accelerate delivery". 

4 https://ec.europa.eu/info/publications/171011-communication-banking-union_en. 
5 http://www.consilium.europa.eu/en/press/press-releases/2016/06/17/conclusions-on-banking-union/. 
6 COM(2018) 37. 
7 I.e. the fully loaded leverage ratio that is calculated in a more stringent manner and presented before 2019, when 

the transitional phase ends. The softening effect of the transitional implementation period is ignored. 

2 

 
 
 
                                                            
The  Commission  has  also  put  forward  several  further  substantial  measures  in  order  to 
reduce  risks  and  enhance  resilience  of  the  EU  banking  sector.  For  example,  in  November 
2016,  the  Commission  proposed  a  significant  legislative  package  to  review  the  Bank 
Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation 
(SRMR),  the  Capital  Requirements  Directive  IV  (CRDIV)  and  Capital  Requirements 
Regulation  (CRR)  with  the  objective  of  further  reducing  risks  in  the  banking  sector.8  The 
same  year,  the  Commission  also  adopted  a  proposal  for  a  Directive  on  preventive 
restructuring procedures, second chance for entrepreneurs, and the efficiency of insolvency 
frameworks.9 Effective restructuring and insolvency rules are essential for the prevention or 
reduction of NPLs and for a well-functioning Capital Markets Union. The Commission calls 
on the European Parliament and the Council to show determination on these important files 
in order to facilitate their swift adoption. 

Addressing the high stock of NPLs10 and their possible future accumulation is essential to 
complete Banking Union.  NPLs are loans where the borrower has  difficulties to  make  the 
scheduled payments to cover interest and/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.  The  financial  crisis  and  subsequent  recessions  led  to  a  more 
widespread  inability  of  borrowers  to  pay  back  their  loans,  as  more  companies  and  people 
faced  continued  payment  difficulties,  or  even  bankruptcy.  This  was  particularly  so  in 
Member States that faced long or deep recessions. Consequently, many banks saw a build-
up of NPLs on their books. 

High stocks of NPLs can weigh on bank performance through two main channels: 

1.  NPLs  generate  less  income  for  a  bank  than  performing  loans  and  thus  reduce  its 
profitability, and may cause losses that reduce the bank’s capital. In the most severe 
cases,  these  effects  can  put  in  question  the  viability  of  a  bank,  with  potential 
implications for financial stability. 

2.  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. 

The primary responsibility for tackling high levels of NPLs remains with the affected banks 
and Member  States. The Commission  has  consistently raised this matter, for the countries 
concerned, in the context of the European Semester. At the same time, there is also a clear 
EU  dimension  to  reducing  current  NPL  ratios,  as  well  as  preventing  any  excessive  future 
build-up of NPLs, given the interconnectedness of the EU’s banking system in general and 
that  of  the  euro  area  in  particular.  There  are  important  potential  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 shared agreement on the need to continue 
and  extend  the  actions  already  initiated  by  the  Commission,  the  Council  adopted  in  July 

8  http://europa.eu/rapid/press-release_IP-16-3731_en.htm 
9 COM/2016/0723 - 2016/0359 (COD). 
10 NPLs denote loans where the borrower is unable 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 (Commission Implementing Regulation (EU) 2015/227). 

3 

 
 
                                                            
2017 an "Action Plan To Tackle Non-Performing Loans in Europe" that calls upon various 
institutions  –  including  the  Commission  –  to  take  appropriate  measures  to  further  address 
the  challenges  of  high  NPLs  in  Europe.  In  the  First  Progress  Report  on  the  Reduction  of 
NPLs,  the  Commission  committed  to  report  back  in  March  on  the  progress  made  in  the 
implementation of those actions.  

As a result of combined efforts and the current economic recovery, the high stocks of NPLs, 
particularly  in  certain  banks  and  Member  States,  are  being  reduced.  The  average  ratio  of 
NPLs is on a steady downward trend and has decreased by more than one third since 2014.11 
As explained below, progress in reduction of NPLs has also continued over the last couple 
of months. 

It is now essential to reinforce efforts to decisively address the remaining stock of NPLs and 
the possibility of future build-ups of NPLs. 

Together  with  this  Progress  Report,  and  building  on  a  solid  foundation  of  risk-reducing 
measures already taken by the Union, the Commission is putting forward a comprehensive 
package to accelerate the resolution of NPLs in Europe and to prevent their build-up in the 
future. The package consists of two legislative proposals aimed to create a Union wide legal 
framework  to  encourage  the  resolution  of  NPLs  and  a  staff  working  document  providing 
non-binding technical guidance (a so-called “blueprint”) for how national asset management 
companies (AMCs) can be set up. Together, these proposals will: 

  enhance the prudential tools needed to effectively address NPLs; 
  encourage the development of secondary markets for NPLs;  
 

facilitate  debt  recovery  by  enhancing  the  protection  of  secured  creditors  in  an 
extrajudicial proceeding, in a manner complementary to the proposal on preventive 
restructuring  procedures,  second  chance  for  entrepreneurs,  and  the  efficiency  of 
insolvency frameworks put forward in November 2016; and 

  provide  guidance  to  Member  States  –  that  so  wish  –  for  the  restructuring  of  their 

banks by establishing AMCs or other measures dealing with NPLs. 

2.  PROGRESS MADE IN RELATION TO NPLS 

The Commission has devoted significant attention to addressing the issue of NPLs since the 
outset of the financial crisis in 2008-2009. For banks whose viability was threatened by high 
NPLs,  the  Commission  has  assisted  Member  States  in  setting  up  ad  hoc  and  system-wide 
measures  to  reduce  NPL  stocks,  compatible  with  State  aid  rules.12  This  has  resulted  in  a 
substantial  reduction  of  the  aggregate  stock  of  NPLs  in  the  banking  sector.  It  has 
incentivised  banks  to  manage  and  reduce  their  NPLs  via  market  mechanisms  and  thus 
protected  taxpayers  from  bearing  the  costs  through  adequate  burden  sharing  and  in-depth 
restructuring.  Furthermore,  as  part  of  the  requirements  applicable  under  State  aid  rules, 
banks have been required to restructure their business in order to guarantee their long-term 
viability. Where viability could not be ensured, banks were put in liquidation or were taken 
over by viable banks. These actions have contributed to a more resilient and sound banking 

11 See Section 2 for an overview. 
12 In some cases as part of a financial assistance programme. 

4 

 
 
                                                            
system. Similarly, going forward, failing banks will, in order to be eligible to benefit from 
State aid, either be restructured or liquidated, thereby strengthening the banking system. 

The institutional arrangements for the supervision and resolution of EU banks, and notably 
in  the euro area,  have  also  been  strengthened fundamentally  with  the establishment of the 
Banking  Union  and  two  of  its  three  pillars,  the  Single  Supervisory  Mechanism  and  the 
Single Resolution Board.13 Moreover, the European Semester recommendations, which are 
addressed to Member States concerned, have underlined the need to take determined action 
to  address  high  NPL  ratios.  Furthermore,  the  Commission’s  Structural  Reform  Support 
Service gives technical assistance to Member States on NPL-related projects.14 The ECB in 
its supervisory capacity, the Single Supervisory Mechanism, national competent authorities 
and  the  European  Banking  Authority  (EBA)  have  also  played  an  important  role  in 
enhancing the supervision and reporting of NPLs in Europe, while the ECB has played an 
integral role in safeguarding the financial stability in the EU. As a result of these combined 
efforts,  there  has  been  significant  progress  over  recent  years  in  reducing  the  volumes  and 
ratios of NPLs in EU banks. 

In particular, the latest figures, for the end of Q3 2017, confirm the downward trend of the 
NPL ratio in the EU. It declined to 4.4%, down by roughly 1 percentage point year-on-year 
(see  Figure  1),  and  down  by  0.2%  or  EUR  40  billion  quarter-on-quarter.  As  a  result,  the 
ratio reached its lowest level since Q4 2014. This is the outcome of a decrease in the volume 
of  NPLs,  as  well  as  a  rise  of  the  volume  of  loans  in  the  EU.  The  provisioning  ratio15 
remained stable, amounting to 50.7%. Despite these positive developments, decisive action 
must continue and be accelerated. 

13 The third pillar of Banking Union, the European Deposit Insurance Scheme (EDIS), 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 EDIS. 

14 (EU) 2017/825. 
15 Source: ECB. Due to the unavailability of provisioning data for loans, the provisioning ratio for the EU is based 

on impairments and NPLs for all debt instruments (loans and debt securities). 

5 

456Mar-15Sep-15Mar-16Sep-16Mar-17Sep-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 
 
 
                                                            
NPL  ratios  have  been  recently  falling  in  nearly  all  Member  States,  although  the  situation 
among  them16  differs  significantly  (see  Table  1).  Yet,  there  is  encouraging  progress  in 
Member  States  with  still  high  NPL  ratios,  due  to  a  combination  of  policy  actions  and 
economic growth. 

Table 1: Non-performing loans and provisions by Member State 17 

Source: ECB, Consolidated Banking Data. Calculations by Commission services (DG FISMA). 

16 At the end of Q3 2017, several Member States had low NPL ratios (10 Member States had ratios below 3%). 

Others had high ratios (8 Member States had ratios above 10%). 

17 Notes: Figures correspond to domestic credit institutions and foreign-controlled subsidiaries and branches.  
* Sector-specific data for Portugal and the EU are not available. Figures correspond to loans and advances to all 
sectors. Sector-specific data (i.e. total exposure to households and non-financial corporations) for Bulgaria, 
Germany, Spain and Hungary are only available in carrying amount.  

** Data for the provisioning of loans are unavailable for Bulgaria, Germany, Spain, Hungary and the EU. In these 

cases, figures are based on impairments and NPLs for all debt instruments (i.e. loans and debt securities). 
Aggregate data for the EU were not available for Q2 and Q3 2016. The figure in the table for 2016 corresponds to 
Q1 2016. 

6 

Table:  Non-performing loans and provisions2017Q32016Q32017Q32016Q32017Q32016Q3Belgium2.73.43.94.450.148.9Bulgaria11.513.718.622.056.655.1Czech Republic2.64.35.06.354.250.9Denmark2.73.43.03.939.638.7Germany2.12.74.04.942.643.2Estonia2.01.92.72.642.951.3Ireland11.214.415.418.637.241.8Greece46.747.450.450.349.149.8Spain4.75.86.37.559.259.5France3.23.94.54.960.360.3Croatia10.811.315.816.769.074.6Italy12.116.115.719.953.650.0Cyprus32.136.851.355.547.339.5Latvia6.06.29.010.144.144.6Lithuania3.74.44.95.934.438.7Luxembourg0.71.01.72.352.439.2Hungary9.613.714.121.767.163.9Malta3.44.45.76.844.740.7Netherlands2.22.42.93.137.241.3Austria3.85.85.37.263.859.2Poland6.66.67.27.357.960.6Portugal14.617.714.617.750.247.3Romania8.110.210.313.570.162.9Slovenia10.814.413.918.870.971.7Slovakia4.14.94.65.470.464.5Finland1.21.42.12.131.834.0Sweden1.21.21.41.434.536.1United Kingdom1.62.11.62.141.238.5European Union4.45.54.45.550.747.7Gross NPLs and advances (% of total gross loans and advances)Private sector NPLs* (% of private-sector loans)Total loss provisions (loans)**  (% of total doubtful and non-performing loans)  
 
 
                                                            
Despite  this  significant  progress,  NPLs  continue  to  pose  risks  to  economic  growth  and 
financial  stability.  The  total  volume  of  NPLs  across  the  EU  is  still  at  around 
EUR 910 billion, well above pre-crisis levels.18 Structural impediments continue to hamper 
a  faster  fall  in  NPL  stocks.  Provisioning  is  often  too  slow  and  insufficient  to  allow  for 
effectively  resolving  and  preventing  any  critical  accumulation  of  NPLs  in  the  future. 
Activity on secondary markets for NPLs is not yet sufficient to substantially support NPL 
reduction  efforts,  despite  the  increased  interest  from  certain  investor  groups  and  the 
increasing  volume  of  NPL-related  transactions.  Moreover,  debt  restructuring,  insolvency 
and debt recovery processes – in the absence of progress on proposals already put forward 
by the Commission – are still too slow and lack legal certainty in some cases. 

3.  A COMPREHENSIVE PACKAGE TO ADDRESS REMAINING AND FUTURE NPLS 

Despite  good  progress,  further  legislative  measures  appear  necessary  to  address  the 
remaining issues linked to high levels of NPLs. In this context, a comprehensive approach is 
needed and should focus on a mix of complementary policy actions in four areas: (i) bank 
supervision and regulation, (ii) further reforms of national restructuring, insolvency and debt 
recovery  frameworks,  (iii) developing  secondary  markets  for  distressed  assets,  and 
(iv) fostering,  as  appropriate  and  necessary,  restructuring  of  banks.  Action  in  these  four 
areas should be taken at national level and at EU level where necessary. The Commission is 
committed  to  deliver  on  those  elements  of  the  NPL  Action  Plan  that  are  under  its  direct 
responsibility. 

Today,  the  Commission  adopts  a  comprehensive  package  addressing  the  four  areas 
described  above,  thereby  fostering  financial  stability  in  the  EU  (see  Figure 2  on  how  the 
Commission’s package of measures fits into the general Action Plan). The proposed action 
will enable banks and Member States to address NPLs in an even more determined way than 
before and avoid excessive build-up of NPLs in the future. 

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

If loans, nevertheless, become non-performing, more efficient enforcement mechanisms for 
secured  loans  will  allow  banks  to  work  out  NPLs,  subject  to  appropriate  safeguards  for 
debtors and with the exception of loans granted to consumers. 

If  despite  the  measures  above,  NPL  stocks  become  too  high  –  as  is  currently  the  case  for 
some banks in certain Member States – banks will be able to sell NPLs to other operators on 
efficient, competitive and transparent secondary markets. Supervisory authorities will guide 
banks  in  these  endeavours,  based  on  their  existing  bank-specific  –  so-called  Pillar  2  – 
powers under the Capital Requirement Regulation.19 

Where  NPLs  have  become  a  significant  and  broad-based  problem,  Member  States  that  so 
wish  may  set  up  national  AMCs  or  other  measures  under  current  State  aid  and  bank 
resolution rules. 

18 Source: ECB. 
19 Regulation (EU) No 575/2013 (Capital Requirements Regulation) 

7 

 
 
 
 
                                                            
Figure 2: Elements of the Council “Action Plan to Tackle Non-Performing Loans in Europe” 20 

The Commission’s NPL package 

Enhancing the 
protection of secured 
creditors 

Develop secondary 
markets for NPLs 

Develop an AMC 
Blueprint 

Addressing potential 
under provisioning, 
via automatic and 
time-bound 
provisioning 

Interpretation of Art 
16 SSMR and Art 
104 CRD IV 

Benchmarking of 
national loan 
enforcement and 
insolvency 
frameworks  

Extend SSM NPL 
guidelines to small 
banks 

Adopting EU-wide 
NPE management 
guidelines 

Improving loan tape 
information required 
from banks 

Strengthening NPL 
data infrastructure 

Enhanced disclosure 
requirements on asset 
quality and NPLs for 
all banks 

Develop the focus 
on insolvency 
issues in the 
European Semester 

New guidelines on 
banks’ loan 
origination, 
monitoring and 
internal governance 

Develop 
macroprudential 
approaches to tackle 
the build-up of future 
NPLs 

4.  SUFFICIENT LOAN LOSS COVERAGE BY BANKS FOR FUTURE NPLS 

A  Regulation  amending  the  Capital  Requirements  Regulation21  will  require  banks  to  have 
sufficient  loan  loss  coverage  for  newly  originated  loans  if  these  become  non-performing 
exposures. The amendment introduces a ‘statutory prudential backstop’ in order to prevent 
the  risk  of  under-provisioning  of  future  NPLs.  Such  a  backstop  amounts  to  minimum 
coverage levels of provisions and deductions from own funds that banks will be required to 
have  for  incurred  and  expected  losses  on  newly  originated  loans  that  later  turn  non-
performing.  In  case  a  bank  does  not  meet  the  applicable  minimum  level,  deductions  from 
own funds would apply. 

To  ensure  consistency  in  the  prudential  framework,  the  Commission  also  introduces  a 
common  definition  of  non-performing  exposures  (NPE),  in line  with  the  one  already  used 
for  supervisory  reporting  purposes.  The  prudential  backstop  will  reduce  financial  stability 
risks  arising  from  high  levels  of  insufficiently  covered  NPEs,  by  avoiding  the  build-up  or 
increase  of  such  NPEs  with  spillover  potential  in  stressed  market  conditions.  It  will  also 
ensure  that  institutions  have  sufficient  loss  coverage  for  NPEs,  therefore  protecting  their 
profitability,  capital  and  funding  costs  in  stressed  times.  In  turn,  this  would  ensure  that 
stable, less pro-cyclical financing is available to households and businesses. 

20 Note on abbreviations: AMC (Asset management company), SSMR (Single Supervisory Mechanism Regulation) 

CRD IV (Capital Requirements Directive IV). 

21 Regulation (EU) No 575/2013. 

8 

 
 
 
 
                                                            
5.  A DIRECTIVE ON CREDIT SERVICERS, CREDIT PURCHASERS AND THE 

RECOVERY OF COLLATERAL  

The Directive enables banks to deal in a more efficient way with loans once these become 
non-performing by improving conditions to either enforce the collateral used to secure the 
credit or to sell the credit to third parties. Accelerated extrajudicial collateral enforcement as 
a  swift  mechanism  for  recovery  of  value  would  reduce  the  costs  for  resolving  NPLs  and 
would hence support banks in recovering value. In cases where banks face a large build-up 
of NPLs and lack the staff or expertise to properly service them, the Directive facilitates the 
outsourcing of the servicing of these loans to a specialised credit servicer or the sale of the 
credit agreements to a credit purchaser that has the necessary risk appetite and expertise to 
manage it.  

The  two  avenues  for  banks  to  deal  with  NPLs  facilitated  by  this  Directive  reinforce  each 
other.  Shorter  time  of  resolution  and  increased  recovery,  as  expected  with  accelerated 
extrajudicial collateral enforcement, increases the value of the NPLs as well as bid prices in 
possible NPL transactions. It is also easier to price a collateralised NPL than an unsecured 
one  in  secondary  markets  because  the  value  of  the  collateral  sets  a  minimum  value  of  a 
NPL. Hence, credit purchasers will prefer NPLs with the accelerated extrajudicial collateral 
enforcement feature. This, in turn, would give additional incentives for credit institutions to 
use  this  feature  at  the  origination  of  new  loans.  Moreover,  the  harmonisation  achieved  by 
accelerated  extrajudicial  collateral  enforcement  would  foster  the  emergence  of  pan-
European NPL investors, which would further improve market liquidity. 

5.1.  Further develop secondary markets for NPLs  

The  Directive  will  contribute  to  the  development  of  secondary  markets  for  NPLs  by 
removing undue impediments to loan servicing by third parties and to the transfer of loans 
to loan purchasers, while fully respecting the existing Union civil law acquis and Member 
States’ consumer protection rules. 

Currently,  banks  are  not  always  able  to  manage  their  NPLs  in  an  effective  or  efficient 
manner. In such cases, banks will recover less from their portfolio than would otherwise be 
possible.  This  may  occur,  for  example,  when  banks  face  a  large  volume  of  NPLs  and  are 
unable to properly service their NPLs. Banks may also find themselves with a portfolio of 
NPLs where the nature of the loans falls outside of the banks’ core expertise to recover. In 
these instances, the best option may be to either outsource the servicing of these loans to a 
specialised loan servicer or sell the credit agreement. 

For these reasons, the proposal creates a common set of rules that credit servicers need to 
abide by to operate cross-border within the Union. The proposal sets common standards to 
ensure proper conduct by and supervision of loan purchasers and credit servicers across the 
Union,  while  allowing  more  competition  by  harmonising  market  access  rules  across 
Member States. This will lower the cost of entry for potential loan purchasers by increasing 
the accessibility of credit servicing and by reducing the costs of credit servicing. A higher 
number  of  purchasers  on  the  market  means  a  more  competitive  market,  leading  to  higher 
demand and transaction prices. 

In  order  to  have  a  sound  secondary  market  for  NPLs  and  a  solid  framework  for  credit 
servicers, clear rules are proposed to protect consumers’ rights and interests. The proposal 

9 

 
 
includes  legal  safeguards  and  transparency  rules,  making  sure  that  the  level  of  consumer 
protection is not impacted by the transfer of the debt. Particular attention is paid to the most 
vulnerable  and  over-indebted  consumers.  For  example,  credit  servicers  should  have 
appropriate policies in place for dealing with borrowers and, where needed, should refer the 
consumer to debt-advice or social services. 

To  prevent  possible  new  NPLs  in  the  context  of  consumer  loans,  Member  States  are  also 
invited to put in place rules for the assessment of consumer affordability. The preparatory 
work on creditworthiness assessment envisaged in the Consumer Financial Services Action 
Plan  22  is  ongoing,  and  the  Commission  will  continue  the  work  with  Member  States  to 
define  best  practices  and  guiding  principles  for  credit  institutions  when  assessing  the 
creditworthiness of consumers. 

5.2.  More efficient value recovery from secured loans 

The  Directive  will  also  provide  secured  creditors  with  a  more  efficient  method  of  value 
recovery  from  secured  loans  through  an  accelerated  extrajudicial  collateral  enforcement. 
This refers to an expedited and efficient out-of-court enforcement mechanism that enables 
secured  lenders  to  recover  value  from  collateral  granted  solely  by  companies  and 
entrepreneurs to secure loans. Such mechanisms already exist in 25 Member States (yet in 
half  of  these,  the  scope  of  such  mechanisms  is  limited  to  either  movable  or  immovable 
assets). 

The proposal will help banks to improve their current workout processes, and manage NPLs 
by increasing the efficiency of debt recovery procedures through an accelerated extrajudicial 
collateral  enforcement.  In  the  majority  of  cases,  banks  address  their  NPLs  themselves  by 
recovering  value  through  workout.  A  large  share  of  loans  that  become  NPLs  are  loans 
secured by collateral. While banks are able to enforce collateral under national insolvency 
and debt recovery frameworks, the process can often be slow and lack legal certainty. In the 
meantime, NPLs remain on banks’ balance sheets, keeping the bank exposed to prolonged 
uncertainty and tying up its resources. This prevents the bank from focusing on new lending 
to  viable  customers.  Therefore,  the  proposal  includes  an  efficient  method  for  banks  and 
other undertakings authorised to grant loans, in order to allow them to recover their funds 
from  secured  loans  to  business  borrowers,  in  an  out-of-court  procedure.  This  efficient 
extrajudicial  procedure  would  be  accessible  when  agreed  upon  in  advance  by  both  lender 
and  borrower,  in  the  loan  agreement.  It  will  not  be  available  for  consumer  credits,  and  is 
designed to not affect early restructuring or insolvency proceedings. It will not impact the 
insolvency  laws  of  the  Member  States  on  issues  such  as  the  hierarchy  of  creditors  in 
insolvency.  

Restructuring  and  insolvency  proceedings  prevail  over  the  accelerated  extrajudicial 
collateral enforcement procedure set out in this proposal. In order to ensure full consistency 
and  complementarity  with  the  Restructuring  Proposal,  the  following  principle  will  apply: 
the  extrajudicial  enforcement  of  collateral  would  be  possible  only  as  long  as  a  stay  of 
individual  enforcement  actions,  in  accordance  with  applicable  national  laws,  is  not 
applicable.  The  Restructuring  Proposal  already  foresees  that  creditors,  including  secured 
creditors of a company or an entrepreneur that is undergoing restructuring proceedings, are 

22 COM(2017) 139. 

10 

 
 
                                                            
subject to a stay of individual enforcement actions. In this case, the debtor in difficulty can 
negotiate a restructuring plan with creditors and avoid insolvency. 

6.  A TECHNICAL BLUEPRINT FOR HOW NATIONAL ASSET MANAGEMENT 

COMPANIES (AMCS) CAN BE SET UP 

As part of the package, Member States are also provided with non-binding guidance on how 
they  can  set  up,  if  they  so  wish,  national  AMCs  in  full  compliance  with  EU  banking  and 
State aid rules. The AMC Blueprint provides practical guidance for the design and set-up of 
AMCs at the national level, building upon best practices from past experiences in Member 
States, to the extent applicable. AMCs can be private or (partly) publicly supported with no 
need  for State aid, if the State can  be considered to  act as any other economic agent. The 
option of an AMC involving State aid should not be seen as the default solution. That said, 
considering AMCs with a State aid element as an exceptional solution, the Blueprint aims to 
clarify the permissible design for such AMCs, fully consistent with the EU legal framework, 
particularly the BRRD, the SRMR and State aid rules. 

The  Blueprint  suggests  a  number  of  common  principles,  such  as  the  relevant  asset 
perimeter,  the  participation  perimeter,  considerations  on  the  asset-size  threshold,  asset 
valuation rules, the appropriate capital structure, and the governance and operations of the 
AMC. In addition, the Blueprint describes certain alternative impaired asset relief measures 
that  do  not  constitute  State  aid,  such  as  market-conform  State  guarantees  enabling  the 
securitisation of NPLs. The Commission has in the past years also assessed other measures 
proposed  by  Member  States  to  deal  with  legacy  NPLs  and  will  continue  to  do  so  in 
individual cases, in order to ensure that these measures fully respect the BRRD, SRMR and 
State aid rules. 

7.  A STRONG PACKAGE WITH MUTUALLY REINFORCING MEASURES  

The proposals in this package mutually reinforce each other and would not be as effective if 
implemented in isolation. The statutory prudential backstop will ensure that credit losses on 
future  NPLs  are  sufficiently  covered,  making  their  resolution  or  sale  easier.  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  extrajudicial  collateral  enforcement  as  a  swift  mechanism  for  recovery  of 
collateral value reduces the costs for resolving NPLs. 

The package covers a major part of the Council Action Plan. In combining several elements, 
the  package  as  a  whole  creates  the  appropriate  environment  for  dealing  with  NPLs  on 
banks’ balance sheets, and to reduce the risk of future NPL accumulation. Their impact is 
expected to be different across Member States and institutions concerned. Some will have a 
stronger impact on banks’ ex-ante risk assessment at loan origination, some will foster swift 
recognition  and  better  management  of  NPLs,  and  others  will  enhance  the  market  value  of 
such NPLs. 

In particular: 

  The proposal on prudential backstops will ensure that credit losses on future NPLs are 
sufficiently  provisioned  for,  making  their  resolution  and/or  disposal  easier.  These 
effects  would  be  complemented  by  more  developed  secondary  markets  for  NPLs  as 

11 

 
 
these would strengthen demand for NPLs and raise their market value. This will allow 
banks to sell NPLs more easily in light of more stringent provisioning rules. 

  AMCs have historically proven to be a useful tool under the right pre-conditions and 
they remain a useful part of the toolkit, even if the relevant EU legal framework has 
evolved in recent years. However, the usefulness of AMCs is diminished if secondary 
markets for NPLs are undeveloped, as one important tool of an AMC is the sale of its 
loans to third-party investors. The AMC and many other potential credit purchasers are 
highly dependent on the availability of independent companies to service and manage 
the loans on their behalf. Therefore, AMCs will be more effective if supported by the 
legal proposals that the Commission puts forward in this package. Conversely, without 
improvement  in  the  functioning  of  secondary  markets  for  NPLs,  an  AMC  may 
experience more difficulties in fulfilling its purpose. 

  Furthermore, accelerated extrajudicial collateral enforcement as a swift mechanism for 
recovery  of  collateral  value  would  reduce  the  costs  for  resolving  NPLs  and  would 
therefore  support  banks  and  purchasers  of  NPLs  in  recovering  value.  Such  a 
mechanism  available  outside  the  context  of  preventive  restructuring  or  insolvency 
proceedings  would  complement  the  proposal  for  a  Directive  on  restructuring,  second 
chance, and the efficiency of insolvency frameworks of November 2016. 

Figure 3: NPL Package: Reinforcing effects between actions 

Furthermore,  the  Commission  is  exploring,  together  with  the  ECB  and  the  EBA,  how  to 
foster further transparency of NPLs and markets for NPLs. To achieve this, the availability 
and  comparability  of  data  on  NPLs will  need to  be  enhanced.  One  idea  being explored  in 
this context is to support the development of NPL information platforms or credit registers 
by  market  participants.  The  exploratory  work  is  close  to  being  finalised  and  a  dedicated 
technical note will present the joint work by the Commission, ECB and EBA. 23 

23 The management of NPLs would benefit from more efficient and predictable loan enforcement and insolvency 
frameworks. The Commission is therefore undertaking a benchmarking exercise of such regimes in order to 
establish a reliable picture of the delays and value recovery that banks experience when faced with borrowers' 

12 

 
 
 
                                                            
 
Finally, the initiatives put forward by the Commission today are also highly complementary 
to  the  other  elements  of  the  Council  Action  Plan,  including  the  proposed  measures  to  be 
taken  by  Member  States,  supervisory  authorities  and  other  EU  institutions.  More 
specifically,  the  following  measures  will  complement  those  proposed  by  the  Commission 
today: 

  general guidelines on NPL management to all EU banks;  

  detailed guidelines on banks’ loan origination, monitoring and internal governance, 

addressing in particular transparency and borrower affordability assessment;  

  macro-prudential  approaches  to  prevent  the  emergence  of  system-wide  NPL 
problems, taking into account potential pro-cyclicality and implications on financial 
stability of NPL policy measures; and 

  disclosure requirements with regard to banks’ asset quality and NPLs. 

The actions by the Commission, the ECB, the EBA and the European Systemic Risk Board 
will  create  important  synergies.  The  proposed  statutory  minimum  coverage  requirements 
would  provide  strong  incentives  for  banks’  management  to  prevent  the  accumulation  of 
future NPLs through better NPL management and stronger loan origination practices. This 
will reinforce the expected effects of the ongoing work by the ECB and the EBA on banks’ 
loan origination, NPL management, monitoring and internal governance practices. Work on 
NPL  information  and  market  infrastructure  would  further  enhance  the  functioning  of 
secondary markets for NPLs. 

8.  CONCLUSIONS 

In line with the overall significant progress on risk reduction in the EU banking sector, the 
stock  of  NPLs  continues  to  decline.  Despite  this  positive  trend,  high  NPLs  remain  a 
challenge for several Member States and for the EU as a whole. 

Accelerating the current trends of NPL reduction and preventing new NPLs from building 
up  is  an  important  step  towards  completing  the  Banking  Union.  While  the  ECB’s 
supervision  of  large  and  systemic  banks  (Single  Supervisory  Mechanism)  and  the  Single 
Resolution  Board  are  now  operational,  the  Banking  Union  remains  incomplete.  The  key 
building  blocks  of  the  post-crisis  prudential  and  resolution  frameworks  are  in  place  or 
nearing  completion,  and  risks  in  the  euro  area  banking  sector  are  being  reduced 
significantly. This means that the time has come to put in place the two missing elements of 
the  Banking  Union:  a  common  fiscal  backstop  to  the  Single  Resolution  Fund  and  the 
European  Deposit  Insurance  System.  Within  an  incomplete  Banking  Union,  the  banking 
sector  will  remain  fragmented  along  national  lines  and  will  consequently  not  provide  the 
economic benefits and increased stability of a more integrated sector. 

The comprehensive package launched today is a major step in addressing this challenge. It 
is necessary to maintain this pace of progress in implementing all envisaged measures in the 

defaults. It invites close cooperation from Member States and supervisors to develop a sound 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. This is crucial to demonstrate the efficiency of 
the regulatory framework in Member States as regards insolvent debtors. 

13 

 
 
                                                                                                                                                                                      
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 future accumulation. 

While  individual  banks  and  Member  States  concerned  need  to  maintain  their  efforts  at  a 
sustained pace, concerted action by the Commission and other EU institutions, including the 
ECB, must also continue. The package of legislative and non-legislative measures presented 
today,  alongside  this  Communication,  constitutes  a  critical  part  of  this  work.  The 
Commission therefore calls on the European Parliament and the Council to progress swiftly 
on this important matter, in order to support the ongoing joint efforts to reduce risk in the 
European  banking  sector.  At  the  same  time,  the  pending  legislative  measures  on  risk 
reduction  –  the  November  2016  Banking  Package24  –  and  business  restructuring  and 
insolvency  law  must  be  given  utmost  political  priority  and  agreed  upon  as  rapidly  as 
possible. The Commission stands ready to engage with the co-legislators to this effect. 

24http://europa.eu/rapid/press-release_IP-16-3731_en.htm. 

14