(1)

The European Central Bank (ECB) is responsible for the effective and consistent functioning of the Single Supervisory Mechanism (SSM). It oversees the functioning of the system and ensures the consistent application of high supervisory standards and the consistency of supervisory outcomes across the participating Member States. The ECB may issue guidelines to national competent authorities (NCAs), in accordance with which supervisory tasks are to be performed and supervisory decisions are to be adopted by NCAs.

(2)

The ECB ensures the consistent application of prudential requirements for credit institutions within the participating Member States, in accordance with Regulation (EU) No 1024/2013 and Regulation (EU) No 468/2014 of the European Central Bank (ECB/2014/17) (2).

(3)

While NCAs are primarily responsible for reviewing the arrangements, processes, mechanisms and strategies implemented by credit institutions that are classified as less significant to ensure a sound management and coverage of their risks – including their provisioning policies and treatment of assets in terms of own funds requirements – the ECB, in its oversight role within the SSM, should promote the consistent application of high supervisory standards in the execution of such reviews. In this context, a consistent application of high supervisory standards to the supervisory review of management and coverage of non-performing exposures (NPEs) for less significant supervised entities across the SSM contributes to the broader objectives of ensuring that: (a) a coherent and effective prudential supervisory approach is implemented with respect to all credit institutions in the participating Member States; (b) the single rulebook for financial services is applied consistently to all credit institutions in the participating Member States; and (c) all credit institutions in the participating Member States are subject to supervision of the highest quality.

(4)

Ensuring adequate management and coverage of NPEs has been an important priority within the SSM since its inception. The ECB has followed a supervisory approach to NPEs based on the framework devised by the Union legislator, and taking into account the interpretative guidelines adopted by the European Banking Authority. As part of this supervisory approach, the ECB has communicated supervisory coverage expectations for NPEs held by significant supervised entities. Those expectations refer to NPEs where the exposure was originated prior to 26 April 2019 and which are therefore not subject to the deduction requirement under Regulation (EU) No 575/2013 of the European Parliament and of the Council (3). For less significant supervised entities, coverage of such NPEs has to date not been subject to uniform supervisory practices across the SSM. Coverage of NPEs has been subject to the approaches defined by NCAs for their respective supervisory activities.

(5)

As shown by the experience gained by the ECB in the context of the supervisory approach followed with respect to significant supervised entities, sufficient and timely coverage of NPEs promotes pro-active management of those exposures, the reduction of their stock, and provisioning levels that are commensurate with the risks associated with their vintage and the evolution of recoverable amounts.

(6)

Therefore, the supervisory approach of NCAs in relation to coverage of NPEs held by less significant supervised entities should cover the review of provisioning policies and treatment of assets in terms of own funds requirements of those supervised entities.

(7)

Such a supervisory approach to coverage of NPEs is considered to be an effective tool to mitigate two key risks. The first is the persistence of material stocks of NPEs with high vintages (also referred to as legacy NPEs) and limited provision coverage, which constitute lasting sources of potential further losses and restrict banks’ capacity for new lending. The second is the possibility of inconsistencies in the prudential treatment of those NPEs which are subject to the deduction requirement under Regulation (EU) No 575/2013 and those which are not, where those inconsistencies are not justified by specific circumstances.

(8)

Those two key risks are material. The aggregated ratios of NPEs both for significant and for less significant supervised entities have in general exhibited a sustained downward trend since the inception of the SSM. This trend was more pronounced for significant supervised entities and came to an end in 2024. In light of potentially resurgent NPE ratios, it is considered that, given satisfactory overall levels of capital and the ample time less significant supervised entities have recently had to make progress on the reduction and coverage of legacy NPEs on their own initiative, a harmonised supervisory approach of NCAs in relation to coverage of NPEs held by less significant institutions is proportionate to the supervisory objective of addressing the two key risks related to those NPEs, in order to strengthen the resilience of less significant supervised entities to potential adverse developments in the macroeconomic environment and associated deteriorations in credit quality.

(9)

To assess the coverage by less significant supervised entities of non-performing exposures that are within the scope of this Guideline, it is necessary for NCAs to obtain detailed data in relation to coverage of such exposures. Such data is not currently included in the information that institutions are required to report under Commission Implementing Regulation (EU) 2021/451 (4), and therefore NCAs should require less significant supervised entities to report it for each relevant reporting reference date,

(1)

‘reporting reference date’ means 31 December of a given calendar year;

(2)

‘non-performing exposure within the scope of this Guideline’ means an exposure that meets the conditions for derogation from Article 36(1), point (m), of Regulation (EU) No 575/2013 as provided for in Article 469a of that Regulation;

(3)

‘technical guarantee’ means in relation to an exposure a guarantee which guarantees the ability of the debtor to comply with contractual non-economic obligations such as the supply of goods or execution of works towards a third party and which does not have the character of a credit substitute.