Non-performing loans: Council approves position on capital requirements for banks’ bad loans

31 October 2018

On 31 October, EU ambassadors approved the Council’s position on capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets.

On the basis of this text, the presidency will be able to start negotiations with the European Parliament as soon as the Parliament is ready to negotiate.

The proposal, initially put forward by the Commission in March 2018, aims at creating a prudential framework for banks to deal with new NPLs and thus to reduce the risk of their accumulation in the future. In particular, it sets requirements to set aside sufficient own resources when new loans become non-performing and creates appropriate incentives to address NPLs at an early stage.

A bank loan is considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying the agreed instalments or interest. When customers do not meet their agreed repayment arrangements for 90 days or more, the bank must set aside more capital on the assumption that the loan will not be paid back. This increases bank’s resilience to adverse shocks by facilitating private risk-sharing, while at the same time reducing the need for public risk-sharing. Further, addressing possible future NPLs is essential to strengthen the Banking Union, as well as preserves financial stability and encourages lending to create growth and jobs within the Union.

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