NPE metrics

Credit institutions should closely monitor the relative and absolute levels of NPEs and FBEs, as well as foreclosed assets (or other assets stemming from NPE activities) and early arrears, in their books.

Credit institutions should carry out such monitoring activities at transaction/borrower level, and portfolio or subportfolio levels, as appropriate, considering aspects such as business line, borrower segment, geographical area, products, concentration risk, level of collateralisation and type of collateral provided, and debt-service ability.

Credit institutions should monitor the level of impairments of NPEs in order to provide the management body with comprehensive information on coverage. The analysis should include data on the aggregate level as well as the levels for different NPE portfolios. The selection of NPE portfolios should consider aspects such as type of exposure, including secured/unsecured, type of collateral and guarantees, geographical area, number of years since NPE classification, time to recovery, and the use of the going and gone concern approach. Coverage movements should also be monitored and reductions clearly explained.

Credit institutions should benchmark indicators related to the NPE ratio and coverage against the available indicators of peers in order to provide the management body with a clear picture of the competitive position and potential shortcomings.

Credit institutions should monitor their deviations from the budget, in order for the management body to understand the drivers of significant deviations from the plan.

Key figures on NPE inflows and outflows should be included in periodic reporting to the management body, including transfers from/to NPEs, non-performing FBEs, NPEs under probation, performing FBEs and early arrears (≤ 90 days past due).

Credit institutions should estimate the migration rates and the quality of the performing exposures month by month, so that actions can be prioritised and taken promptly to inhibit deterioration of portfolio quality. Migration matrices can be further broken down by exposure type (retail mortgage, consumer, real estate), by business unit or by other subportfolio to identify whether the driver of the flows can be attributed to a specific subportfolio.

In their monitoring activities, credit institutions should use internal information (e.g. from internal score systems) and external information (e.g. from rating agencies, credit bureaus, specialised sector research or macroeconomic indicators for specific geographical areas) and should refer to a particular point in time or observation period. Annex 3 includes examples of such internal and external information.