COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Tackling non-performing loans in the aftermath of the COVID-19 pandemic
Date: 2020-12-16
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU banking union, banking supervision, coronavirus disease, credit policy, crisis management, economic recession, epidemic, financial market, financial solvency, loan

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 16.12.2020 COM(2020) 822 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK Tackling non-performing loans in the aftermath of the COVID-19 pandemic  
 
 
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL AND THE EUROPEAN CENTRAL BANK 

Tackling non-performing loans in the aftermath of the COVID-19 pandemic 

INTRODUCTION 

The  COVID-19  pandemic  has  led  to  a  sharp  economic  downturn  in  the  EU  and 
worldwide.  To  shield  households  and  businesses  from  its  impact,  EU  regulators  and 
supervisors  have  taken  measures  to  support  the  immediate  ability  of  banks  to  continue 
lending and absorb losses related to the pandemic. In particular, the Commission COVID-19 
banking  package,  which  included  an  Interpretative  Communication  on  the  Union’s 
accounting  and  prudential  frameworks  (‘Supporting  businesses  and  households  amid 
COVID-19’)1, as well as targeted ‘quick fix’ amendments2 to EU banking prudential rules 
(the  Capital  Requirements  Regulation  (CRR)3),  aimed  at  ensuring  that  banks  were  able  to 
continue lending to households and to businesses during the most acute phase of the crisis. 
Banks  are in  fact part of the solution  today, largely  reflecting their strong  capital  position 
following the significant reforms carried out after the 2008 financial crisis. Member States 
have also taken decisive action, with support schemes to alleviate liquidity difficulties 
affecting  households  and  businesses.  These  schemes  typically  involve  public  guarantee 
schemes  and/or  payment  deferrals  (‘moratoria’).  These  measures  help  borrowers  with 
temporary liquidity problems and prevent  a surge in non-performing loans (NPLs). In this 
respect,  the  European  Banking  Authority  (EBA)  has  recently  decided  to  reactivate  its 
Guidelines on legislative and non-legislative moratoria.4 The Commission has also adopted 
a Temporary Framework to enable Member States to use the full flexibility foreseen under 
State aid rules to support the economy in the context of the COVID-19 outbreak. 

The financial health of the EU banking sector remains strong after the initial economic 
and  financial  shock  caused  by  COVID-19,  yet  risks  are  tilted  to  the  downside.  In 
Q2-2020,  the  average  Tier  1  capital  ratio  for  all  EU  banks  amounted  to  16.4%,  and  the 
average  NPL  ratio  stood  at  2.8%.  The  liquidity  coverage  ratio  for  significant  financial 
institutions stood at a comfortable 165.5%. However, despite extensive support measures at 
EU and Member State level, the pandemic has hit the economy hard, with all Member States 
now  in  recession.5  Banks  are  exposed  to  companies  and  individuals  that  have  become 

1   COM(2020) 169 final. 
2   The amendments entered into application on 26 June 2020, in time for banks’ financial reporting on the second 
quarter. See Regulation (EU) 2020/873 as regards certain adjustments in response to the COVID-19 pandemic 
(OJ L 204, 26.6.2020, pp. 4–17). 

3   Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms (OJ L 176, 

27.6.2013, p. 1). 

4   See https://eba.europa.eu/eba-reactivates-its-guidelines-legislative-and-non-legislative-moratoria. 
5   European Commission, ‘Autumn 2020 Economic Forecast’. 

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financially  more  vulnerable,  in  particular  small  and  medium-sized  enterprises  (SMEs) 
whose  income  and  financing  sources  are  less  diversified,  and  specific  industries  (e.g. 
transport, tourism and hospitality). It is therefore vital to closely monitor the situation and 
possible  risks  to  financial  stability  as  well  as  ensure  that  banks  can  continue  to  play  a 
constructive  role  in  the  recovery  following  the  economic  downturn.  Further  structural 
measures  could  be  needed  to  prevent  the  accumulation  of  NPLs  on  banks’  balance  sheets 
over the medium term. The Commission recommends that financial institutions, supervisors 
and policy makers at Union and Member State level jointly take resolute action to increase 
the financial system’s preparedness, thereby supporting financial stability and the economic 
recovery. 

Addressing a renewed build-up of NPLs on banks’ balance sheets as early as possible 
is  a  key  lesson  from  the  last  economic  crisis.  The  Commission  therefore  organised  a 
roundtable  with  public  and  private  stakeholders  on  tackling  NPLs  in  the  aftermath  of  the 
COVID-19  pandemic  in  September  2020  in  order  to  discuss  different  elements  that  could 
constitute an effective strategy. Based on the exchanges in this roundtable, the Commission 
believes that an effective strategy should focus on a mix of complementary policy actions in 
order  to:  (i) further  develop  secondary  markets  for  distressed  assets6,  which  would  allow 
NPLs  to  be  moved  off  the  banks’  balance  sheets  while  ensuring  adequate  protection  for 
debtors;  and  (ii) reform  the  insolvency  and  debt  recovery  frameworks,  ensuring  an 
appropriate balance of interests between creditors and debtors. 

Secondary markets and insolvency frameworks also already constituted an important 
part  of  the  2017  Council  Action  Plan  on  NPLs7.  Despite  significant  progress  on 
implementation, key measures, in particular the Commission’s proposal for a Directive on 
credit  servicers,  credit  purchasers  and  for  the  recovery  of  collateral8,  have  not  yet  been 
adopted by the European Parliament  and Council. Moreover, the Recovery and Resilience 
Facility  (RRF) can provide substantial  support to reforms  to  reduce NPLs, in  particular to 
improve  insolvency,  judicial  and  administrative  frameworks  that  underpin  efficient  NPL 
resolution.  Lastly,  banks  should  be  incentivised  as  much  as  possible  to  apply  a  proactive 
approach  to  engage  with  their  debtors  early  and  constructively.  The  Commission  would 
further  support  Member  States,  through  the  Technical  Support  Instrument9,  in  preparing 
their national framework and bolstering their supervisors’ capacity to deal with rising levels 
of NPLs. 

Building  on  the  2017  Council  Action  Plan,  further  targeted  measures  are  needed  to 
address  a  possible  accumulation  of  NPLs  over  the  medium  term  as  a  result  of  the 
COVID-19 pandemic. In this Communication, the Commission therefore proposes a range 
of new measures to help address the upcoming flows of NPLs. 

As  there  is  still  considerable  uncertainty  surrounding  the  economic  outlook  under 
COVID-19,  it  is  important  to  take  stock  of  the  broader  policy  toolkit  to  be  ready  to 
this  end,  this 
deal  with  any  potential  difficulties  with  individual  banks.  To 

See: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2021. 

6   To this end, measures should be taken at national and at Union level, as appropriate. 
7   ECOFIN Council ‘Action Plan to Tackle Non-Performing Loans in Europe’, July 2017. 
8   COM(2018) 135 final - 2018/063 (COD). 
9   COM(2020) 409 final. 

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Communication,  building  on  the  Commission’s  Blueprint  on  the  set-up  of  asset 
management  companies  (AMCs)10,  provides  a  framework  for  Member  States  to  deal  with 
the economic consequences of COVID-19, where necessary. This includes how the possible 
use  of  precautionary  measures,  in  compliance  with  the  Union’s  bank  resolution  and  State 
aid  frameworks,  can  be  used  to  help  address  the  impact  of  COVID-19  on  the  economy, 
complementing the fiscal support measures deployed, to a varying extent, by Member States 
to help affected businesses.  

When  addressing  the  challenge  of  tackling  NPLs,  it  is  important  to  ensure  that 
consumers,  and  especially  vulnerable  borrowers,  are  properly  protected.  Among  the 
measures  already  put  forward,  in  particular  as  regards  the  market  for  credit  servicers  and 
credit purchasers, the Commission has proposed that a transfer of a loan to another investor 
upholds  the  protection  that  the  affected  borrowers  had  agreed  with  the  original  lending 
bank.11  The  Commission  has  also  welcomed  the  ‘best  practices’  agreed  by  the  financial 
sector,  and  consumer  and  business  organisations,  which  outline  how  different  market 
participants can support citizens and businesses throughout the crisis.12 Following up on this 
agreement, the Commission intends to organise a new roundtable meeting to take stock of 
relief measures offered during the first wave of the pandemic in Member States, as well as 
to  discuss to  what  extent the best  practices were applied on the  ground,  and whether they 
proved useful in helping consumers and businesses make use of national relief measures. In 
taking  any  additional  actions  in  future,  the  Commission  will  continue  to  maintain  a  fair, 
robust and consistently enforced consumer protection regime. 

To ensure that the strategy outlined in this Communication is delivered effectively, the 
Commission  will  establish  an  NPL  advisory  panel  consisting  of  relevant  industry 
stakeholders  and  consumer  organisations.  This  panel  will  support  the  Commission  in 
implementing many of the proposed actions. The purpose of the panel  would be to advise 
the Commission as regards future proposals. 

1.  RECENT DEVELOPMENTS IN NON-PERFORMING LOANS 

After  a  gradual  improvement  in  recent  years,  NPL  ratios  in  the  EU  have  seen 
somewhat  of  a  trend  reversal  due  to  the  impact  of  the  COVID-19  pandemic.  Driven 
mainly by reduced NPL sales and restructuring activities as well as new defaults, the latest 
figures show that the gross NPL ratio for all EU banks experienced a first uptick, rising to 
2.9% in Q1-2020, up from 2.6% in Q4-2019 (see Figure 1). This put an end to the overall 

10  SWD(2018)  72  final.  This  document  was  a  part  of  the  Commission’s  package  of  measures  carrying  out  the 
elements  within  its  remit  of  the  2017  Council  Action  Plan.  It  was  drafted  jointly  by  the  Commission,  the 
European Central Bank (ECB), the European Banking Authority (EBA) and the Single Resolution Board (SRB). 
It clarifies key success factors and the permissible design for such state-sponsored AMCs, consistent with the EU 
legislative  framework,  particularly  the  Bank  Recovery  and  Resolution  Directive  and  the  Single  Resolution 
Mechanism  Regulation,  which  are  fully  in  force  and  aim  at  limiting  government  interventions,  and  State  aid 
rules. 

11   See COM(2018) 135 final. 
12   ‘Best practices in relation to relief measures offered to consumers and businesses in the context of the COVID-

19 crisis’, 14 July 2020. 
See:  https://ec.europa.eu/info/sites/info/files/business_economy_euro/banking_and_finance/documents/200714-
best-practices-mitigate-impact-pandemic_en.pdf. 

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downward trend since Q4-2014. In Q2-2020, the average NPL ratio for all EU banks stood 
at 2.8%. When focusing on significant institutions13, the situation is somewhat different, as 
the EU NPL ratio amounted to  2.94% in  Q2-2020, down slightly from 3.05% in  Q1-2020 
and  3.22%  in  Q4-2019.  The  provisioning  ratio14  improved  considerably  to  63.4%  in 
Q2-2020,  up  1.6 percentage  points  quarter-on-quarter  and  4.5 percentage  points  year-on-
year. The absolute amount of NPLs (gross value) for all banks in the EU stands at EUR 
588  billion  (Q2-2020),  compared  to  EUR  585  billion  in  Q1-2020  and  EUR  646  billion  in 
Q4-2019.15  Table  1  shows  that  the  situation  continues  to  differ  significantly  between 
Member States. 

Most  Member  States  have  seen  encouraging  progress  in  recent  years  thanks  to  a 
combination  of  economic  growth  and  determined  action  by  banks,  supervisors  and 
policymakers.  This  has  facilitated  the  reduction  in  NPL  volumes  and  NPL  ratios. 
Furthermore, the Commission has continued to work constructively with Member States to 
enable  case-specific  solutions  for  banks  within  the  framework  of  Union  State  aid  and 
Banking Union crisis management rules. 

Figure 1: NPL ratio in the EU 

However,  it  is  important  to  recognise  that  in  recent  years  a  rather  robust  economic 
environment  helped  tackle  NPLs  in  several  Member  States.  In  recent  months,  the 
decrease in the volume of NPLs decelerated or has stopped, as a result of the pandemic 
and the accompanying lockdown measures. Available analysis highlights certain areas of 
concern  in  terms  of  repayment  capacity,  in  particular  for  SMEs  and  some  specific  sectors 
particularly affected by the pandemic.16 For the moment, measures adopted at national level 
in  response  to  the  crisis  have  prevented  more  widespread  defaults  on  the  repayment  of 
loans. This has helped to contain the rise in NPLs. However, there is uncertainty on how the 

13   Credit institutions directly supervised by the ECB. 
14   This  ratio  indicates  the  extent  of  funds  a  bank  has  kept  aside  to  cover  loan  losses.  Source:  ECB.  Due  to  the 
unavailability  of  provisioning  data  for  loans,  the  provisioning  ratio  for  the  EU  was  calculated  by  considering 
impairments and NPLs for all debt instruments (loans and debt securities). 

15   Source: ECB. 
16   ‘The  EU  banking  sector:  First  insights  into  the  COVID-19  impacts’,  EBA  thematic  note  EBA/REP/2020/17, 

https://eba.europa.eu/covid-19-placing-unprecedented-challenges-eu-banks. 

4 

23456201520162017201820192020Source: European Central BankEU total gross non-performing loans and advances, in % of total gross loans and advances, end-of-quarter values 
 
 
                                                           
unwinding of measures taken to contain the crisis will affect borrowers and their banks. In 
addition,  while  the  substantial  use  of  corporate  support  programmes  has  shielded  banks 
from  COVID-19  losses  in  several  Member  States,  banks  have  become  the  first  line  of 
defense in  those countries that did  not implement  such programmes (or only implemented 
smaller ones). 

Table 1: NPLs and provisions by Member State17 

Source: ECB. Calculations by European Commission. 

Now that the economic environment has taken a sharp downturn, it will be crucial for 
Member States to take further decisive policy action as needed and to address issues in 
national insolvency frameworks so that banks are able to manage the upcoming flow of 

17 Notes: Figures correspond to domestic credit institutions and foreign-controlled subsidiaries and branches. 
*  Sector-specific  data  are  unavailable  for  the  EU,  Finland,  Malta  (i.e.  for  Q2-2019  and  Q2-2020)  and  Sweden  (i.e.  for 
Q2-2019).  Sector-specific  data  (i.e.  total  exposure  to  households  and  non-financial  corporations)  for  Bulgaria,  Germany 
and Hungary are only available in carrying amount.  
** Data for the provisioning of loans are unavailable for Sweden (i.e. for Q2-2019) and for Bulgaria, Germany, Hungary 
and the EU. In the latter cases, figures are based on impairments for all debt instruments (i.e. loans and debt securities). 
Data are unavailable for Hungary (i.e. for Q2-2020). 

5 

2020Q22019Q22020Q22019Q22020Q22019Q2Austria2.02.32.83.176.569.6Belgium2.12.02.82.758.453.7Bulgaria6.76.910.010.560.661.2Croatia5.36.98.310.386.774.2Cyprus14.519.523.333.555.453.2Czech Republic1.61.83.03.482.269.0Denmark2.01.92.42.245.442.1Estonia2.11.82.12.355.742.4Finland1.51.4--42.634.0France2.32.63.43.666.264.8Germany1.21.32.02.089.085.3Greece30.939.637.043.847.849.7Hungary4.05.05.66.5-84.1Ireland3.54.26.06.854.937.0Italy6.38.18.210.659.858.5Latvia5.35.45.67.541.038.8Lithuania2.72.22.83.047.336.4Luxembourg0.60.71.82.055.852.0Malta3.43.1--50.549.3Netherlands1.91.82.82.440.131.6Poland6.26.26.76.774.070.4Portugal5.58.36.69.266.459.2Romania4.44.85.96.593.083.6Slovakia2.93.13.23.492.989.0Slovenia3.24.54.55.980.174.6Spain2.93.44.04.469.463.8Sweden1.01.11.3-32.2-European Union2.82.9--63.458.9Gross 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)  
 
 
                                                           
new NPLs. This would allow NPLs to be addressed in the most decisive manner possible, in 
turn preventing a renewed build-up of NPLs on banks’ balance sheets. As a basis for this, 
the proper recognition and management of NPLs by banks will continue to be important.18 
The  sooner  banks  identify  and  provision  for  potential  NPLs,  the  faster  and  smoother  the 
NPL  resolution  and  disposal  process  will  be,  averting  damaging  hangover  effects  in  the 
future.  Banks  should  also  be  encouraged  to  identify  debtor  distress  early  and  engage 
proactively with their debtors in timely and appropriate restructuring when needed. When it 
comes to companies in particular, banks should be expected to develop capacity to promptly 
assess  changes  in  their  debt  servicing  abilities  and  differentiate  between  liquidity  and 
solvency needs. 

2.  DEVELOPMENT OF SECONDARY MARKETS FOR DISTRESSED ASSETS 

A  deep  and  liquid  secondary  market  for  distressed  assets  would  provide  banks  with 
the possibility to reduce their NPLs by selling them to third-party investors. This would 
help  banks  focus  on  their  core  activities  by  freeing  up  space  in  banks’  balance  sheets  for 
new  lending,  enabling  them  to  fund  the  economic  recovery.  Easier  market  entry  and 
participation  should  be  encouraged,  especially  for  smaller  sellers  and  buyers  who  may  be 
crucial for local-level NPL resolution. 

One  vital  step  is  to  quickly  reach  an  agreement  on  the  Commission’s  proposal  for  a 
Directive on credit servicers, credit purchasers and the recovery of collateral adopted 
in  March  201819.  This  proposal  seeks  to  open  up  markets  whilst  ensuring  that  the  debtor 
protection across the single market is not weakened in case of sale of the loan in respect to 
the protection that the initial lending bank offered. It would ensure that consumer protection 
obligations  are  upheld  irrespective  of  how  NPLs  are  resolved.  The  Council  reached  a 
negotiating mandate on the proposal, but the European Parliament is not yet ready to start 
inter-institutional negotiations. 

To  prevent  a  renewed accumulation  of  NPLs on  banks’  balance  sheets  over  a  longer 
time  period,  the  Commission  also  proposed  targeted 
improvements  to  the 
securitisation  framework  for  banks’  non-performing  exposures  (NPEs20).21  The 
Commission  welcomes  the  agreement  reached  by  the  co-legislators  in  December  2020. 
These  improvements  will  provide  crucial  support  in  tackling  the  fallout  of  the  COVID-19 
crisis. Removing existing regulatory obstacles and amending the securitisation framework to 
cater  for  the  special  characteristics  of  NPE  securitisations,  while  maintaining  high 
prudential standards, will enable the broader use of this tool by banks to free their balance 
sheets from NPEs. 

18   See the EBA’s ‘Guidelines on management of non-performing and forborne exposures’, EBA/GL/2018/06. 
19   COM (2018) 0135 final – 2018/063 (COD). 
20   NPLs  are  part  of  a  wider  set  of  NPEs.  For  instance,  beyond  loans,  such  exposures  could  include  other  debt 

instruments, such as a debt security, an advance and a demand deposit. 

21   COM(2020) 282 final and COM(2020) 283 final. 

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2.1.  Improving data quality and data comparability 

Further  improving  the  quality  and  comparability  of  data  on  NPLs  would  be  a  key 
action in cultivating secondary markets for such NPLs. The data templates that the EBA 
developed in 2017 provide a good starting point for a common dataset for NPL transactions 
in the EU, facilitating financial due diligence and the valuation of NPL transactions. These 
templates  aim  to  reduce  information  asymmetries  in  EU  NPL  markets  and  could  be  a 
starting point for a common data standard for transactions, enabling NPLs to be compared, 
also across jurisdictions.  

However, these templates are not widely used yet by market participants due to their 
voluntary  nature  and  complexity,  making  it  important  to  explore  ways  to  expand  their 
use.  The  Commission  would  therefore  aim  at  mandating,  in  early  2021,  the  EBA  to 
review  the  templates  based  on  a  consultation  with  market  participants,  both  on  the 
buyer  and  seller  side,  to  take  place  in  the  course  of  2021.  The  review  should  seek  to 
better distinguish between critical and non-critical data based on practical experience from 
past  NPL transactions  and address the needs of  buyers whilst  taking into account  existing 
data and data processing costs for sellers. This was clearly signalled in the discussions with 
stakeholders in the Commission’s NPL roundtable in September 2020. The overall timing of 
that  initiative  would  depend  on  the  adoption  of  the  proposed  directive  on  credit  servicers 
and  credit  purchasers,  which  would  allow  to  turn  the  revised,  more  proportionate  and 
simpler EBA data template into implementing technical standards.  

To expand the use of the template by  market participants and thereby improve data 
comparability  and  quality,  the  template  could  become  mandatory,  initially  only  for 
new  NPLs,  i.e. for  loans  that  turn  non-performing  after  a  specific  cut-off  date.  The  data 
standard would be obligatory, but there could be some flexibility on the data fields that must 
be populated. In this respect, the EBA would need to give guidance on what information is 
considered  critical,  after  consultations  with  stakeholders.  Moreover,  banks  should  not  be 
penalised  if  they  do  not  have  non-essential  data.  Hence,  the  secondary  market  for  NPLs 
would  be  best  supported  by  making  the  use  of  the  template  mandatory,  yet  allow  data 
providers to use a no-data option, if needed and for specific non-essential data fields. 

2.2.  Data infrastructure 

To  increase  market  transparency  at  granular  level,  the  Commission  considers  that 
there would be merit in establishing a central data hub at EU level. Such a hub would 
act  as  a  data  repository  underpinning  the  NPL  market.  It  would  operate  a  comprehensive 
electronic database (updated regularly), assess the information and provide access to market 
participants,  notably  credit  sellers,  credit  purchasers,  credit  servicers,  NPL  sellers  and 
private  NPL  platforms.  The  hub  would  offer  a  platform  for  cooperation  and  coordination 
with  a  pan-European  scope.22  The  hub  could  help  establish  a  common  data  standard 
(increasing  the  use  of  the  EBA  data  template  as  the  standard  for  conducting  NPL 
transactions),  offer  data  quality  checks  and  automated  validation,  and  assist  sellers  with 
their data preparation for reporting. 

22   It would be ensured that such cooperation/coordination complies with EU antitrust rules, notably when it comes 

to exchanges of confidential information. 

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On the basis of a public consultation, which would be planned for the first half of 2021, 
the  Commission  would  explore  several  alternatives  for  establishing  a  data  hub  at 
European  level  and  determine  the  best  way  forward.  For  instance,  one  of  the  options 
could  be  to  establish  the  data  hub  by  extending  the  remit  of  the  existing  European 
DataWarehouse (ED).23  

The  data  hub  at  European  level  would  collect  and  store  anonymised  data  on  NPL 
transactions that have taken place and provide such post-trade transaction details and 
sale  prices  to  market  participants.24  This  would  allow  market  participants  to  compare 
transactions  and  gain  insights  into  the  actual  pricing  of  assets  and  market  liquidity  on  a 
systematic  basis.  The  data  hub  could  also  provide  information  on  investors,  their 
preferences and profiles as well as general information on judicial processes. 

Going  beyond  information  on  transactions  themselves,  post-trade  information 
provided by NPL buyers on workout cash flow for the assets that they have purchased 
could  deliver  crucial  insights  into  the  market  for  NPLs.25  Performance  data  are  key 
information that investors currently lack publicly in the market. In particular, information on 
recovery  and  expense  cash  flows  would  support  the  decision-making  process  of  investors 
interested in similar assets and would help them in determining the prices they are willing to 
pay and helps diminish uncertainty. The incentive for NPL buyers to submit this information 
ex  post  would  mainly  be  the  prospect  that  they  would  gain  access  on  the  other  side, 
providing  them  with  insights  into  performance  in  the  workout  of  comparable  assets.  This 
would provide a benchmark and would improve their estimations of fair prices/bids in future 
transactions. 

Delivering  more  transparency  in  this  manner  would  be  key  to  supporting  price 
discovery  and  thereby  rendering  markets  more  efficient.  This  would  help  narrow  the 
often high bid-ask spread, which remains a material hurdle that prevents many transactions 
from  happening.  Banks,  credit  servicers,  AMCs  and  potentially  credit  purchasers  would 
share  information  with  the  data  hub  on  transactions  and  on  the  post-trade  performance  of 
assets. In return, these data providers would gain access to the pool of anonymised data and 
to the analytical services offered by the data hub. This is important as stakeholders tend to 
deliver/share data, so they can gain access on the other side. If such post-trade data could be 
consolidated  in  a  single  location,  it  would  mitigate  this  issue  for  the  secondary  market. 
Detailed  data  on  recovery  rates  and  workout  timing  by  asset  class,  legal  process  and 
jurisdiction  would  certainly  help  investors  broaden  their  activities  across  the  EU.  Existing 
data pooling initiatives clearly demonstrate the need for additional workout data. The data 
hub  could  therefore  provide  a  key  market  utility  in  this  respect,  delivering  increased 

23   The European DataWarehouse (ED) is part of the asset-backed securities (ABS) Loan Level Data initiative 
established by the ECB. It provides a centralised securitisation repository for collecting, validating and 
distributing detailed, standardised and asset class specific loan-level data for ABS and private whole loan 
portfolios in Europe. It stores loan-level data and corresponding documentation for investors and other market 
participants. It has a narrowly targeted mandate and is not allowed to compete with its stakeholders, mainly 
European banks. 

24   At  a  later  stage,  it  could  be  explored  under  what  circumstances  banks  (and  other  data  owners)  would  feel 

comfortable with also sharing pre-trade information on NPLs. 

25   Ongoing workout data could be shared in the form of the EBA NPL data template or ESMA NPL securitisation 
template. These portfolios could be reported in the same way as securitisation portfolios, requiring very limited 
adjustment to the existing data infrastructure. 

8 

 
 
                                                           
transparency  and  secondary  market  information  on  NPLs.  This  initiative  would  need  to 
comply  with  the  EU  General  Data  Protection  Regulation  (GDPR)  and  would  need  to 
guarantee that the information provided to third parties would only be used to promote the 
NPL secondary market and not to collect data on banks’ balance sheets for other purposes 
(e.g. M&A processes).26 

2.3.  Leveraging existing data sources 

Market participants can be more active and efficient if they are given more and better 
data.  Anonymised  data,  if  granular  enough,  can  be  used  to  derive  useful  aggregates  in 
addition  to  the  aggregate  information  already  provided  on  the  basis  of  the  Pillar  3 
disclosures27  by  banks  using  the  standards  developed  by  the  EBA.  In  order  to  optimise 
resources, the reporting could usefully be integrated in the existing EBA data point model 
and developed in close collaboration with the competent authorities. 

There are a number of data sources that in fact already exist and could form the basis 
for  regular  reports  on  aggregate  information  that  would  be  made  available  to 
secondary market participants. The entities that collect and store the information would 
take care of reporting, thereby avoiding any additional reporting burden on e.g. banks. The 
Commission  would  explore  in  early  2021,  together  with  relevant  stakeholders,  how  these 
existing  datasets  could  be  mobilised  and  made  available  to  market  participants  in  suitably 
aggregated forms to ensure bank and borrower confidentiality. This would be a quick win at 
low  cost.  If  done  at  a  suitable  level  of  granularity,  this  could  improve  the  information 
available to new investors and the ability of investors to participate in countries outside their 
core  expertise.28  Furthermore,  the  Commission  would  explore  how  cooperation  and 
connections  could  be  cultivated  between  the  data  hub  at  European  level  and  these  data 
sources. 

Key examples of existing data sources include: 

-  The  ECB’s  ‘Analytical  Credit  Dataset’  (‘AnaCredit’),  which  collects  and  shares 

granular credit risk data within the EU banking sector. 

-  Securitisation  repositories,  which  centrally  collect  and  maintain  the  records  of 
securitisation instruments and underlying assets. They therefore possess good loan-
level data, which can also provide NPL secondary market participants with valuable 
insights. 

-  Data reporting by banks on the time to recovery and recovery rates (gross and net of 
recovery costs): following up on the Capital Markets Union (CMU) Action Plan of 

26   The  data  would  also  need  to  be  anonymised  in  the  sense  of  the  General  Data  Protection  Regulation  (GDPR). 

Recital 26 of the GDPR clarifies when data can be considered anonymous. 

27   Pillar  3  of  the  Basel  Framework  lays  out  a  comprehensive  set  of  public  disclosure  requirements  that  seek  to 
provide market participants with sufficient information to assess an internationally active bank’s material risks 
and capital adequacy. 

28   For  example,  reporting  recovery  rates  and  workout  timing  by  NUTS  3  region,  borrower  type  (corporate 
individual) and asset class (e.g. unsecured, secured with residential or commercial real estate for different loan-
to-value bands). 

9 

 
 
                                                           
24 September 202029, the Commission would first assess the feasibility of recurrent 
reporting, using existing data points as far as possible. 

Lastly, the Commission would consult stakeholders within the first half of 2021 on the 
potential  review  of  Pillar  3  disclosure  requirements  under  the  CRR.  Examples  of 
further disclosures benefiting markets may include cure rate, time to recovery, recovery rate, 
etc. The release of such additional information should not pose any disadvantage to banks, 
as the information could further increase transparency on NPLs to the benefit of secondary 
markets.  Keeping  in  mind  the  potential  overlap  with  the  NPL  data  templates,  the  EBA 
would  be  invited  to  look  into  this  in  detail  to  ensure  an  efficient  and  proportionate 
development of disclosure requirements. 

2.4.  ‘Best execution’ sales process 

The  Commission  would  aim  to  develop  guidance,  by  the  third  quarter  of  2021,  for 
sellers  of  NPLs,  in  cooperation  with  the  EBA  and  in  discussion  with  other  relevant 
stakeholders.  This  would  include  recommendations  on  what  constitutes  a  ‘best 
execution’  sales  process  for  the  transactions  on  the  secondary  markets.  This  would 
encourage good sell-side processes across the board and might help smaller banks or sellers 
in  particular,  which  may  have  less  experience  with  secondary  market  transactions.  The 
guidance could outline some conditions for helping to secure a successful outcome, which 
might  include:  ensuring  a  non-discriminatory/neutral  sales  process,  the  need  to  advertise 
widely,  a  common  set  of  due  diligence  materials,  accepting  bids  electronically,  the  use  of 
EBA  data  templates,  etc.  Market  participants  would  not  be  obliged  to  follow  the 
recommendations formulated in this document, which would serve instead as a tool to guide 
good sales processes.  

The  guidance  could  also  provide  information  on  the  possible  value  added  of  NPL 
transaction  platforms  in  the  sales  process.  This  could  help  banks,  particularly  smaller 
ones, decide whether to use transaction platforms and whether to use them to support their 
objectives.  This  best  execution  sales  process  could  therefore  provide  for  an  indirect  push 
towards the use of such platforms. 

2.5.  Address regulatory impediments to NPL purchases by banks 

One  of  the  remaining  impediments  for  banks  buying  NPLs  in  the  secondary  market 
relates to the regulatory treatment of purchased defaulted assets and the risk weights 
that  banks  need  to  apply  to  calculate  capital  requirements  under  the  Standardised 
Approach  for  credit  risk.  Article 127  of  the  CRR  states  that  if  a  defaulted  unsecured 
exposure is provisioned/written down by more than 20%, the risk weight should be 100%, 
otherwise  150%.  However,  only  provisions/write-downs 
risk 
adjustments’) made by the institution itself can be accounted for, not write-downs accounted 
for  in  the  transaction  price  of  the  exposure.  In  practice,  this  can  lead  to  a  situation  where 
NPL buyers need to apply a higher risk weight to the same unsecured NPLs than the seller 
did. Addressing this issue would mostly benefit smaller banks purchasing NPLs – including 

(so-called 

‘credit 

29   Communication from the Commission on a Capital Markets Union for people and businesses – new action plan, 

COM(2020) 590 final. See Action 11/B. 

10 

 
 
                                                           
some  specialised  NPL  buyers  that  have  a  banking  licence  –  as  these  usually  employ  the 
Standardised Approach for credit risk. This measure would help increase competition on the 
buy-side. 

The  Commission  intends  to  develop  in  early  2021,  together  with  the  EBA,  a  suitable 
approach,  which  would  reduce  the  risk  weight  on  purchased  defaulted  assets  to  an 
appropriate level. Such an approach would need to be consistent with the overall regulatory 
framework, and, if necessary, with appropriate safeguards to avoid underestimation of risk. 

3.  ASSET MANAGEMENT COMPANIES 

Asset  management  companies  (AMCs)  offer  a  number  of  benefits  for  dealing  with 
NPLs.  They  provide  a  very  effective  measure  in  specific  circumstances,  namely  when 
impaired assets affect a large part of the domestic banking system and mainly cover loans 
secured by commercial real  estate and large  corporate exposures. Their primary  goal  is  to 
remove NPLs  from  banks’ balance sheets  and extract  the most value from  them by  active 
workouts and a recovery in asset prices over time. 

It  is  important  to  note  that  AMCs  can  be  private  or  (partly)  publicly  funded.  Even 
when  (some)  public  funding  is  involved,  it  would  not  be  State  aid  if  the  State  can  be 
considered  to  be  acting  in  a  similar  way  to  a  market  economy  operator.  The  option  of  an 
AMC  involving State aid should not  be seen as  the default solution  since AMCs can take 
multiple  forms  and  can  be  structured  and  financed  in  several  ways.  AMCs  can  be 
decentralised,  offering  targeted,  bank-specific  approaches.  Alternatively,  AMCs  can  be 
established  at  national  level.  Such  national  AMCs  could  procure  and  centralise  expertise, 
benefit  from  economies  of  scale  and  creditor  coordination  at  a  higher  level,  and  provide 
relief to affected banks that are struggling to manage their NPLs. This would help the banks 
refocus on lending to viable companies and households. Beyond AMCs, several alternative 
impaired  asset  measures  have  been  implemented  with  success  in  recent  years  by  various 
Member  States.  Alternative  impaired  asset  measures  may  include,  among  others,  bank-
driven  initiatives,  securitisation-based  approaches,  guarantees  or  asset  protection  schemes 
(APSs) as well as ad-hoc AMCs common to one or a limited number of banks. AMCs and 
APSs  pursue  similar  goals,  and  they  can  complement  each  other,  thereby  allowing  for 
tailored  approaches  to  the  specific  impaired  asset  situation  in  a  Member  State.  In  this 
respect,  some  Member  States  are  already  working  with  systemic  securitisation  solutions, 
such  as  the  Garanzia  sulla  Cartolarizzazione  delle  Sofferenze  (GACS)  no-aid  scheme  in 
Italy,  and  the  no-aid  Hercules  scheme  in  Greece,  both  of  which  have  been  successful  and 
where new transactions are being planned. 

AMCs  would  need  to  have  sufficient  financial  firepower  in  terms  of  loss-absorbing 
capacity/equity in order to make a meaningful contribution to tackling COVID NPLs. 
When  focusing  on  the  possibility  of  establishing  AMCs  at  national  level,  they  would 
therefore  need  to  be  endowed  with  a  substantial  financial  envelope  from  the  start.  In  the 
case  of  public  AMCs,  this  contribution  would  likely  take  the  form  of  an  equity  injection 
combined  with  guarantees  on  the  AMC’s  funding.  Market  funding  without  a  guarantee 
should  be  explored  as  part  of  the  design  process  and,  if  feasible,  may  be  preferred  over 
government-guaranteed  funding.  However,  even  if  private  capital  and  funding  could  be 
attracted,  sizeable  public  funding  would  probably  be  needed  in  most  cases,  which  would 
necessitate a State Aid assessment.  

11 

 
 
National  AMCs can be set up according to the needs  of the domestic banking sector. 
The  asset  perimeter  could  be  defined  in  such  a  way  as  to  maximise  potential  and  upside. 
This flexibility on asset perimeter should be framed by the Commission’s AMC Blueprint 
guidance  as  some  asset  classes  are  more  difficult  to  manage  and  it  may  be  challenging  to 
recover value from them. The scope of assets to be transferred to an AMC should always be 
developed in such a way that the AMC’s overall effectiveness is not impaired. 

In order to boost cooperation among national AMCs and create valuable synergies, a 
cross-border network could be enabled at EU level. National AMCs could exchange best 
practices  and  experience,  implement  data  and  transparency  standards  and  coordinate 
creditor  actions  where  necessary.  This  network  could  therefore  increase  the  collective 
effectiveness of national AMCs across the EU. 

The  biggest  benefit  of  such  cooperation  would  be  to  take  advantage  of  economies  of 
scale in dealing with information. It may be considered that the aforementioned data hub 
at  European  level  could  be  suitable  to  provide  a  dedicated  platform  for  coordination  and 
cooperation  between  national  AMCs.  Furthermore,  by  linking  up  the  AMCs  with  the  data 
hub,  it  would  be  possible  to  fill  some  significant  data  gaps  and  add  transparency  to  the 
market.  This  is  important  as AMCs possess a wealth of data that could  be valuable to  the 
wider  market.  National  AMCs  could  therefore  collect  and  publish  NPL-related  (pre-trade) 
data  in  standard  formats  for  increased  market  transparency,  while  complying  with  GDPR 
requirements. Disclosing the holdings and performance of NPLs held by AMCs via the data 
hub  at  European  level  would  allow  investors  and  transaction  platforms  to  compete  more 
efficiently  for  the  assets  of  AMCs  and  to  more  accurately  price  NPLs.  In  addition,  the 
AMCs may, where appropriate, combine efforts to establish a joint transaction platform at 
European  level.  As  many  individual  AMCs  establish  such  platforms  by  themselves  to 
facilitate sales and reach a wider investor base, these efforts could be combined to set up a 
single transaction platform dedicated to sales by participating AMCs. This could also further 
improve cooperation with relevant third-party service providers. 

The benefits of a network approach depend on the degree of homogeneity and number 
of national  AMCs. First,  each national AMC  would  need to  be set  up properly to ensure 
efficiency  within  the  network.  Discrepancies  in  AMC  designs,  operations,  practices,  etc. 
could  have  significant  negative  effects  on  possible  cooperation  between  AMCs.  The 
Commission will therefore actively encourage proper implementation of the AMC Blueprint 
on these matters. Second, a more limited number of national AMCs could hinder some of 
the  positive  network  effects  that  could  result  from  enhanced  cooperation  among  AMCs. 
Nevertheless, it would still be useful to link these AMCs to the data hub at European level. 
They  could  then  use  it  to  coordinate  and  cooperate  with  each  other  in  order  to  share  best 
practices  and  information  on  investors,  debtors  and  servicers.  AMCs  would  be  able  to 
develop  a  better  overview  of  differences  in  performance  in  terms  of  recovery  across 
Member States,  enabling various lessons  to  be learned when comparing the successes and 
shortcomings of these jurisdictions. 

12 

 
 
The Commission stands ready to support Member States in setting up national AMCs 
– if they wish to do so30 – and would explore how synergies and cooperation could be 
cultivated  by  establishing  an  EU  network  of  national  AMCs31,  jointly  with  existing 
national AMCs, the ECB and the EBA. If several Member States forged ahead, the network 
could be built gradually, depending on the speed and extent to which banks would be hit in 
different Member States. 

4.  INSOLVENCY, DEBT RECOVERY AND DEBT RESTRUCTURING FRAMEWORKS 

In the short term, the Commission urges the European Parliament and the Council to 
swiftly  reach  an  agreement  on  the  legislative  proposal32  for  minimum  harmonisation 
rules  on  accelerated  extrajudicial  collateral  enforcement,  with  the  total  exclusion  of 
consumers  from  this  procedure.  While  the  Council  provided  a  negotiating  mandate,  inter-
institutional  negotiations  have  still  not  started.  Given  that  this  measure  would  help  in  the 
recovery by facilitating SME access to bank finance, its adoption should be a priority. 

The benchmarking exercise of loan enforcement regimes (which was part of the 2017 
Council NPL Action Plan) has been finalised.33 In this context, data has been collected on 
the recovery rate and speed that banks experience in practice when trying to enforce NPLs 
in Member States. The outcome of the exercise provides a snapshot of insolvency outcomes 
in terms of delays and value recovery in national proceedings from the perspective of bank 
loan enforcement. Responding to a Call for Advice from the Commission, the EBA gathered 
data  from  banks  in  all  Member  States  that  contributed  voluntarily,  improved  the 
representativeness  of  the  sample  and  increased  data  quality  with  national  competent 
authorities. The final report provides a wide range of useful data, including recovery rates, 
time  to  recovery  and  cost  of  recovery  by  country  and  asset  class,  although  some  Member 
States’ data suffered from lower representativeness. 

The  exercise  enables  a  better  assessment  of  the  efficiency  of  the  legal  framework  in 
Member States in terms of defaulting or insolvent debtors in relation to bank loans. As 
indicated  in  the  2017  NPL  Action  Plan,  stronger  focus  on  the  improvement  of  insolvency 
frameworks  should  be  given  in  the  country-specific  recommendations,  especially  in  those 
countries where high levels of NPLs prevail. 

In  light  of  the  experience  with  the  exercise  and  the  accessibility  of  data,  the 
Commission  will  carefully  analyse  whether  it  is  appropriate  to  make  insolvency 
benchmarking  a  more  regular  exercise.34  The  CMU  Action  Plan  put  forward  an  action 
whereby  data  gathering  exercises  may  be  carried  out  regularly  (based  on  reporting 

30   The AMC Blueprint explains how an AMC  can be set up under the current crisis management framework and 
State aid rules, but the same principles can also be applied to APSs guaranteeing NPLs. The Commission stands 
ready to advise Member States with concrete questions on this. 

31   It  would be ensured that such a network complies with EU antitrust rules notably on exchange of confidential 

information. 

32   COM (2018) 0135 final – 2018/063 (COD). 
33   ‘Report on the benchmarking of national loan enforcement frameworks’, EBA/Rep/2020/29. 
34   This type of information is not supervisory information. At the same time, any reporting requirement on banks to 
competent authorities, even if not supervisory reporting in the strict sense, will have to be assessed in light of the 
burden already imposed by existing supervisory reporting requirements. 

13 

 
 
                                                           
obligations), with the objective of feeding these results into the European Semester. Special 
attention will be paid to avoid any unnecessary burden on banks. 

The  transposition  of  the  Directive  (EU)  2019/1023  on  preventive  restructuring 
frameworks35 should also aid in preventing the build-up of NPLs. The enhancement of 
preventive  restructuring  frameworks  would  ensure  that  action  is  taken  before  enterprises 
default on their loans, thereby helping to reduce the risk of loans becoming non-performing 
in cyclical downturns and mitigating the adverse impact on the financial sector. At the same 
time, non-viable businesses with no prospect of survival should be liquidated as quickly as 
possible.  Member  States  shall  adopt  and  publish  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive by 17 July 202136. 

The  Recovery  and  Resilience  Facility  (RRF)  will  incentivise  and  support  reforms  to 
reduce  NPLs,  in  particular  to  improve  the  efficiency  of  national  insolvency 
frameworks  and  administrative  and  judicial  systems,  including  through  capacity-
enhancing  investments.  This  will  be  of  particular  relevance  for  Member  States  whose 
reform  needs  in  these  areas  have  been  identified  in  2019  and  2020  Country  Specific 
Recommendations in the context of the European Semester. 

The  benchmarking  results  are  also  one  of  the  elements  that  should  feed  into  the 
preparatory work for a legislative or non-legislative action on targeted convergence of 
national  non-bank  insolvency  frameworks  under  the  new  CMU  Action  Plan.  The 
measures  suggested  under  such  initiative  would  address  the  aspects  of  insolvency 
proceedings that have been identified as barriers to cross-border investment. As announced 
in the 2020 Capital Markets Union Action Plan, the Commission will work towards targeted 
harmonisation  or  convergence  of  core  aspects  of  substantive  insolvency  law,  such  as 
triggers  for  opening  insolvency  proceedings,  the  ranking  of  claims,  avoidance  actions,  the 
identification  and  tracing  of  assets  belonging  to  the  insolvency  estate  and  asset  valuation. 
The Commission will, inter alia, also build on the results of a previous comparative study on 
substantive insolvency law in  the EU in  2016,  which revealed vast  differences  in  national 
insolvency frameworks and raised issues that are deemed appropriate for the EU legislator 
to  consider37,  and  will  work  with  a  group  of  independent  experts.  An  Inception  Impact 
Assessment was published in November 202038; a public consultation will follow suit, and a 
group of experts will also undertake technical work. 

35   Directive  (EU)  2019/1023  of  the  European  Parliament  and  of  the  Council  of  20  June  2019  on  preventive 
restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency 
of  procedures  concerning  restructuring,  insolvency  and  discharge  of  debt,  and  amending  Directive  (EU) 
2017/1132 (Directive on restructuring and insolvency). 

36   Pursuant  to  article  34,  paragraph  2,  Member  States  that  encounter  particular  difficulties  in  implementing  this 
Directive could benefit from an extension of one year of the implementation period. Member States shall notify 
to the Commission the need to make use of this option by 17 January 2021 (some Member States have already 
requested such extension). 

37   Available at: https://ec.europa.eu/info/sites/info/files/insolvency_study_2016_final_en.pdf  
38   See  https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12592-Enhancing-the-convergence-

of-insolvency-laws-. 

14 

 
 
                                                           
5.  TACKLING NPLS IN THE AFTERMATH OF THE COVID-19 PANDEMIC 

UNDER THE EU BANK CRISIS MANAGEMENT AND STATE AID FRAMEWORKS 

5.1.  Precautionary public support measures in the COVID-19 context 

While the EU banking sector is generally in a much sounder position than in 2008 and 
several  policy  measures  mitigate  the  potential  impacts  of  COVID-19  on  the  sector, 
both the scale of the national policy responses to the impacts of the pandemic and the 
degree  of  severity  of  such  impacts  across  economic  sectors  is  diverse.  As  a  result, 
available analyses point to the aggregate resilience of the EU banking sector to pandemic-
induced stress39 40, but also indicate that if the situation worsens, some banks might need to 
take action41.  

Authorities might therefore need to be able to intervene in order to avoid impediments 
to  the  post-COVID  economic  recovery.  Market-based  solutions  should  remain  the  first 
and primary tool for addressing NPLs, and the strategy that this Communication lays down 
aims to facilitate them and exploit their full potential. However, if there are indications that 
the  effects  of  the  pandemic  could  cause  distress  to  banks  and  pose  financial  stability 
concerns that exceed the capacity of available market-based solutions, the Union bank crisis 
management42 and State aid43 frameworks allow that, in such extraordinary circumstances, 
precautionary  public  support  can  be  provided  in  order  to  enable  continued  lending  to  the 
real economy, support the recovery and cushion the social impacts of the crisis. 

As the Commission acknowledged in its Communication of March 202044, banks have 
a key role to play in dealing with the effects of the COVID-19 crisis by maintaining the 
flow of credit to the economy. Support to the banking sector is meant to incentivise the 
continued funding of economic activity in the EU. In their policy responses to support the 
real  economy  (through  moratoria,  guarantees,  etc.),  many  Member  States  have  indirectly 
shielded  banks  from  potential  credit  losses.  Similarly,  direct  precautionary  public  support 
from  Member  States  to  banks,  which  would  otherwise  be  solid  without  the  COVID-19 
shock, would seek to minimise the ultimate cost for taxpayers and possible repercussions on 
the real economy. At the same time, application of the Union bank crisis management and 
State aid frameworks would ensure that any support remains targeted and limited and would 
not result in a bailout of banks that were already experiencing viability problems before the 
COVID-19  crisis.  For  institutions  that  are  failing  or  likely  to  fail,  the  Union  crisis 
management framework provides for a set of tools including, in resolution, bail-in. 

39   EBA thematic note EBA/REP/2020/17. 
40   ECB’s COVID-19 vulnerability analysis, 

https://www.bankingsupervision.europa.eu/press/pr/date/2020/html/ssm.pr200728~7df9502348.en.html  

41   ECB’s COVID-19 vulnerability analysis. 
42   Directive  2014/59/EU  establishing  a  framework  for  the  recovery  and  resolution  of  credit  institutions  and 
investment  firms  (OJ  L  173,  12.6.2014,  p.  190–348),  and  Regulation  (EU)  No  806/2014  establishing  uniform 
rules  and  a  uniform  procedure  for  the  resolution  of  credit  institutions  and  certain  investment  firms  in  the 
framework of a Single Resolution Mechanism and a Single Resolution Fund (OJ L 225, 30.7.2014, p. 1–90). 
43   The  framework  established  by  Articles  107,  108  and  109  TFEU  and  regulations  and  all  Union  acts,  including 
guidelines, communications and notices, made or adopted pursuant to Article 108(4) or Article 109 TFEU. 
44   Communication from the Commission, Temporary Framework for State aid measures to support the economy in 

the current COVID-19 outbreak, 2020/C 91 I/01, and subsequent amendments. 

15 

 
 
                                                           
Precautionary  measures  by  Member  States  to  support  liquidity  or  capital  can  take 
different forms as alternative or complementary solutions. Capital support can take the 
form  of  a  direct  injection  of  capital,  but  may  also  be  effected  through  other  types  of 
measures  that  can  help  preserve  the  lending  channel.  In  particular,  the  Commission  has 
already  confirmed  the  possible  use  of  precautionary  measures  to  finance  the  transfer  of 
NPLs  to  an  AMC  in  its  AMC  Blueprint,  provided  that  such  transactions  pursue  the  same 
objectives  of  capital  injections  and  meet  the  same  conditions,  as  is  the  case  with  APSs, 
i.e. public  guarantees  on  a  portfolio  of  assets  on  a  bank’s  balance  sheet.  It  is  therefore 
possible to also implement APSs as precautionary measures under the Bank Recovery and 
Resolution  Directive  (BRRD)45,  taking  into  account  the  relevant  safeguards  needed  to 
ensure  compliance  with  the  applicable  legal  requirements,  as  clarified  in  the  AMC 
Blueprint. 

5.2.  Application of precautionary measures under the BRRD and the State 

aid framework 

The  Union  crisis  management  framework  provides  a  set  of  tools  for  institutions  that 
are  failing  or  likely  to  fail,  including,  in  resolution,  the  bail-in  of  shareholders  and 
creditors.  As  a  rule,  this  applies  to  any  bank  that  requires  extraordinary  public  financial 
support  in  order  to  preserve  its  viability,  liquidity  or  solvency.  However,  the  BRRD 
acknowledges  the  existence  of  exceptional  situations  where  the  need  for  extraordinary 
public financial support will not trigger a declaration that an institution is failing or likely to 
fail. The exceptions are listed in points (i) to (iii) of Article 32(4)(d) BRRD. In particular, an 
injection of own funds in or a purchase of capital instruments from a solvent institution to 
address  a  capital  shortfall  resulting  from  stress  tests,  asset  quality  reviews  or  equivalent 
exercises does not automatically trigger the declaration that an institution is failing or likely 
to  fail,  if  it  remedies,  on  a  temporary  basis,  a  serious  disturbance  in  the  economy  of  a 
Member State and preserves financial stability. 

The measure may be granted only to solvent banks. The condition of solvency is to be 
assessed  by  the  competent  authority,  and  should  be  met  at  the  time  when  the  measure  is 
granted. 

The  Commission  considers  that  the  exception  in  Article  32(4)(d)(iii)  BRRD  may  be 
applied  during  the  COVID-19  crisis.  This  exception  could  apply  to  banks  that  are 
financially viable but may be impacted by a system-wide event such as an EU-wide crisis or 
a  Member  State-wide  crisis.  The  objective  of  this  provision  is  to  allow  Member  States  to 
provide institutions with a temporary capital buffer to deal with severe adverse conditions in 
order  to  boost  confidence  in  the  banking  sector  and  strengthen  financial  stability.  In  its 
Temporary  Framework  for  State  aid  measures  to  support  the  real  economy46,  the 
Commission  already  recognised  that  the  COVID-19  crisis  is  a  serious  disturbance  to  the 
economy  that  can  fall  within  the  scope  of  the  2013  Banking  Communication47.  Measures 

45   Directive  2014/59/EU  establishing  a  framework  for  the  recovery  and  resolution  of  credit  institutions  and 

investment firms (OJ L 173, 12.6.2014, pp. 190–348). 

46   Communication from the Commission Temporary Framework for State aid measures to support the economy in 

the current COVID-19 outbreak, 2020/C 91 I/01, and subsequent amendments. 

47   Communication  from  the  Commission  on  the  application,  from  1  August  2013,  of  State  aid  rules  to  support 

measures in favour of banks in the context of the financial crisis, OJ C 216, 30.7.2013, pp. 1–15.  

16 

 
 
                                                           
taken  to  remedy  such  serious  disturbance  in  the  economy  can  fall  under  the  exception 
provided for in the BRRD. 

The amount of the support measure is to be determined on the basis of a stress test or 
equivalent exercise. As provided for by Article 32.4 (d) of the BRRD, the measure shall be 
confined to solvent institutions and shall be conditional on final approval under the Union 
State aid framework, according to the established practice of the Commission. It is for the 
authorities  conducting  the  stress  test  or  equivalent  exercise  to  determine  the  applicable 
methodology.  The  validity  period  of  the  stress  test  or  equivalent  exercise  is  1  year  in 
principle. As a general rule, the Commission intends to presume that institutions’ accounts 
are correct. However, it  may  request  further verifications by the competent  authority  on  a 
case-by-case  basis,  at  the  time  of  the  granting  of  the  State  aid,  in  order  to  confirm  the 
absence of hidden likely or incurred losses (e.g.  related to  misclassifications or the under-
provisioning  of  loans  at  the  cut-off  date  of  the  stress  test)48.  For  the  Banking  Union,  the 
ECB already completed  a vulnerability  analysis  in  July 2020. The  results of such analysis 
could  be  a  starting  point  to  inform  the  assessment  of  capital  shortfalls  leading  to  support 
measures  pursuant  to  Article  32(4)(d)(iii)  BRRD.49  Similar  considerations  would  apply  to 
stress  tests,  such  as  the  2021  EU-wide  stress  test,  or  exercises  that  national  competent 
authorities or the ECB may conduct in accordance with the same methodology or a similar 
one50. 

From a State aid point of view, public guarantees on a portfolio of assets on a bank’s 
balance  sheet  as  well  as  NPL  transfers  to  a  publicly  backed  AMC  are  considered 
impaired asset measures (IAMs), which are governed by the Commission’s guidelines 
on State aid to banks51. In particular, to be compatible with the applicable State aid rules, 
the  NPL  transfer  price  can  as  a  rule  not  exceed  the  Real  Economic  Value  (REV),  which 
should  reflect  the  underlying  long-term  economic  value  of  the  assets  on  the  basis  of 
underlying cash flows and broader time periods52, to be assessed by independent experts.  

The Commission will consider whether a simplified approach to determining the real 
economic  value  could  possibly  be  used.  This  will  take  into  account  the  strengthening  of 
capital and loss absorption requirements, the accounting standards applied by the banks and 
the assessment by the supervisors of their provisioning policy. 

48   No deduction would be required for the losses booked between the cut-off date of the equivalent exercise and the 
date of the measure if it can be reasonably concluded that the accounts are correct and that there are no hidden 
likely or incurred losses, the institution is solvent and it is reasonably assumed that likely or incurred losses have 
been  fully  absorbed  by  private  means  without  implying  a  breach  of  the  solvency  threshold.  However,  if  the 
competent  authority  identifies  hidden  likely  or  incurred  losses  arising  from  misclassifications  or  under-
provisioning at the cut-off date of the stress test or equivalent exercise, these should have to be deducted from 
the precautionary recapitalisation amount. 

49   The  vulnerability  analysis  does  not  equate  to  a  stress  test  or  AQR,  but  could  be  considered  as  an  equivalent 

exercise. 

50   Any  new  stress  test  or  equivalent  exercise  would  need  to  consider,  for  the  purposes  of  the  definition  of  the 

scenarios, the circumstances prevalent at the time it is performed. 

51   As  laid  down  in  the  Impaired  Assets  Communication  (IAC):  Communication  from  the  Commission  on  the 

treatment of impaired assets in the Community banking sector, OJ C 72, 26.3.2009, pp. 1–22. 

52   See paragraph 40 of the IAC. 

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6.  CONCLUSIONS 

Depending on the shape and speed of the economic recovery and the phasing-out of the 
support  measures  to  businesses  and  households,  banks’  asset  quality  –  and  in  turn 
their  lending  capacity  –  could deteriorate  as  a  result  of  the  COVID-19  crisis.  History 
has shown us that it is  best  to  tackle NPLs  early and with  decisive action, while ensuring 
robust  consumer  protection,  to  allow  the  banking  sector  to  play  its  role  in  supporting  the 
economic recovery. 

Building  on  the  measures  presented  by  the  Council  in  2017,  further  structural 
measures  are  needed  to  address  a  possible  accumulation  of  NPLs  over  the  medium 
term. This Communication presents an EU-wide strategy to anticipate a future build-up of 
NPLs on banks’ balance sheets, while ensuring a high degree of consumer protection. The 
strategy  focuses  on  reducing  risks  (i.e.  by  tackling  NPLs  early,  thus  avoiding  a  possible 
renewed build-up on banks’ balance sheets in the future) and, thereby, on making sure that 
banks are in a position to support the economic recovery. This new approach builds on the 
actions  that  were  endorsed  by  Finance  Ministers  in  2017,  finalising  some  of  the  elements 
that have not been implemented yet.  It would use these actions as a foundation for further 
measures. All of these would be complementary in nature and would have more effect when 
implemented together. 

The  Commission  stands  ready  to  provide  support  to  Member  States  through  the 
Technical Support Instrument in, amongst others, the following areas: (i) development of 
national  NPL  strategies;  (ii)  bolstering  supervisors’  capacity  to  deal  with  rising  levels  of 
NPLs; (iii) establishing a national AMC, in line with the AMC Blueprint and best practices; 
(iv)  developing  and  improving  supervisory  data  management  architecture  and  pursue 
innovation  in  the  area  of  SupTech;  and  (v)  strengthening  the  frameworks  governing  debt 
collection, insolvency and debt restructuring. 

The Commission calls on the European Parliament, the Council and Member States to 
ensure  that  the  strategy  to  address  NPLs  is  implemented  at  the  Union  and  national 
levels  in  a  coordinated  manner.  It  calls  for  a  swift  adoption  of  the  measures  that  have 
already  been  put  forward.  This  includes  the  proposal  for  a  directive  on  credit  servicers, 
credit  purchasers  and  for  the  recovery  of  collateral.  The  Commission  also  calls  for 
constructive support in the implementation of the measures outlined in this Communication, 
and for a proactive approach by Member States to addressing any shortcomings in national 
frameworks. This would help banks in preparing to manage a possible increase in NPLs as 
effectively as possible. 

While  structural  policy  measures  are  taken  for  the  economy  as  a  whole,  the  Union 
bank  crisis  management  and  State  aid frameworks  have  the  tools  to  address  specific 
difficulties  that  may  emerge  in  the  banking  sector  due  to  COVID-19.  In  particular, 
precautionary recapitalisation measures can be deployed for viable banks to respond to the 
possible impacts  of COVID-19 and  allow the banking  sector to  continue to  be part of the 
solution to the crisis. 

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