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 19^th 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.

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.