Europe’s NPL Secondary Market Directive in Focus

In preparation for a potential increase in non-performing loans (NPLs) as COVID-19 support measures are phased out, European governments and the European financial system have been working towards assessing and provisioning for loan losses to avoid adverse incentives for banks.

Following several developments since EDW’s last update on the various steps toward the implementation of the NPL action plan, this blog highlights the current status of Europe’s NPL Secondary Market Directive.

Developments to the Directive on credit servicers and purchasers

Fostering secondary loan markets has become a priority for facilitating bank resolution. The last major development in this area was the amendment to the ‘Directive on credit servicers and credit purchasers’ which was approved by the European Parliament’s plenary on the 19th of October 2021.

This Directive is expected to create further competition on the buy side by creating a passporting regime for credit servicers and introducing harmonised requirements for credit purchasers. It should thus make it easier for banks to either offload NPLs or outsource their servicing to third parties.

Two important points have been amended to address the transparency of credit agreement modifications and the effective functioning of the forbearance framework.

Article 27 lays out the amendments to Directive 2008/48/EC on credit agreements for consumers (Consumer Credit Directive, CCD). As per the amendments proposed to this Directive, a new article 11a has been added stating that prior to modifying the terms and conditions of the credit agreement, the creditor must communicate information to the consumer on the proposed changes, the complaint option, and the respective competent authority detail.

Another amendment to the CCD is the addition of a new article 16a which requires creditors to have adequate policies and procedures to exercise reasonable forbearance before any foreclosure proceedings are initiated. Moreover, such forbearance measures would need to consider a series of options such as the refinancing of the credit agreement or the modification of the existing terms.

Furthermore, the Directive also seeks to increase NPL data availability and comparability by making it mandatory for banks to use the EBA NPLs templates. As per Article 16, the EBA is mandated to turn its 2017 Guidelines into binding implementing technical standards (ITS) specifying the templates to be used for the provision of information on NPLs pursuant to Article 15 (1). The EBA is expected to submit the draft ITS to the Commission by September 2022. In these technical standards, the mandatory data fields and the data treatment for confidential information should be specified. The ITS should be proportionate to the by distinguishing data to be reported on the basis of their criticality as well as considering the size and the nature of the loan.

Finally, the templates should be used for bank-to-bank transactions relating to credits issued on or after 1 July 2018 that become non-performing after the date of entry into force of this Directive. For credits that originate between 1 July 2018 and the date of entry into force of the ITS, credit institutions shall complete the data template with the information already available to them.

With regards to these points, EDW can offer its expertise in the implementation of the data reporting templates. Specifically, EDW’s data quality management and data warehousing models, its corporate governance, and pricing structure can be considered a reference point for the creation of a European NPL data hub. Especially considering that EDW is already onboarding similar data related to the “Annex 10 – add-on non-performing exposures” of the ESMA templates.

Review of EBA NPL data templates

In May 2021, EBA launched a discussion paper to collect feedback from all stakeholders and NPL market participants on the buyer and seller side on the EBA data templates, with a view of publishing a revised version by December 2021. However, the revised templates will not be final but will rather serve as the basis for an additional consultation before the publication of the final ITS in September 2022 under the Secondary Markets Directive.
The consultation, which closed on 31 August 2021, was seeking feedback on how to make the EBA data templates simpler, more proportionate, and effective, as well as more closely aligned with market practices.

As an ESMA-registered Securitisation Repository under the Securitisation Regulation (EU) 2017/2402, EDW is committed to the improvement of all market-related initiatives and, as such, actively contributes to consultations such as EBA’s discussion paper. EDW’s response can be summarised in the following two points.

  • The revised EBA templates have a simplified data structure which is more in line with the current market practices
  • Due to its longstanding experience with the technical implementation of various data reporting templates, EDW has provided the relevant technical feedback to EBA. Also, content relevant feedback was provided where necessary.

Establishment of the EC NPL Advisory Panel

During the summer the EC has also launched a call for applications for the establishment of a dedicated NPL Advisory Panel. EDW is among the 25 representatives selected by the EC. The purpose of the panel is to provide advice and expertise in the area of NPLs and support the EC in the implementation of its NPL Action Plan.

NPL Data Hub proposed as solution to market transparency

The EC’s targeted consultation on improving transparency and efficiency in secondary markets for NPLs came to a close on 8 September 2021, and EDW also submitted a detailed response surrounding the quantity, quality, and comparability of NPL data.
In this regard, EDW highlighted the importance of an NPL data hub to address issues such as market transparency, mispricing, wide bid-ask spread and barriers to entry for new operators. Another key point is that ESMA securitisation disclosures for private or public structured transactions could be considered as a synergy to exchange data with the hub and enrich the database.

Looking ahead

Following these developments, EDW expects the final text of the NPL Secondary Markets Directive to be approved by Council and published in the Official Journal of the EU (OJEU) towards the end of the year or at the beginning of 2022. The Directive will then enter into force on the 20th day following its publication in the OJEU. Member States will have 2 years to transpose the Directive into national law.
EDW will continue working with the industry and the regulators to implement solutions for improving the functioning of the NPL markets across Europe.