Subject matter, scope and definitions

These guidelines specify sound risk management practices for credit institutions for managing non-performing exposures (NPEs), forborne exposures (FBEs) and foreclosed assets.

These guidelines also provide competent authorities with guidance on assessing credit institutions’ risk management practices, policies, processes and procedures for managing NPEs and FBEs as part of the supervisory review and evaluation process (SREP).

These guidelines apply in relation to Article 74 of Directive 2013/36/EU,⁽⁸⁾ which requires institutions to have robust governance arrangements, including a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks they are or might be exposed to and adequate control mechanisms.

Competent authorities should ensure that credit institutions comply with these guidelines on an individual, sub-consolidated and consolidated basis in accordance with Article 109 of Directive 2013/36/EU.

All sections of these guidelines apply to all exposures subject to definitions of non-performing and forbearance as defined in Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab).⁽⁹⁾

For the purposes of the abovementioned definitions of non-performing and forborne exposures in Annex V (opens EUR-Lex in a new tab) to Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab), trading exposures include the exposures in the trading book defined in point 86 of Article 4(1) of Regulation (EU) No 575/2013.

Credit institutions with a gross NPL ratio equal to or greater than 5% on consolidated, sub-consolidated or solo level should apply sections 4 and 5 of these guidelines to the entities that have NPL ratios exceeding the set threshold.

Where credit institutions have a gross NPL ratio below the 5% level but have a high share or material amount of NPEs in an individual portfolio or individual portfolios with a specific concentration of NPEs in a geographical region, an economic sector or a group of connected clients, competent authorities may require credit institutions to apply sections 4 and 5 at the level of these portfolios.

Furthermore, competent authorities may identify credit institutions other than those covered in paragraph 11 that should also apply sections 4 and 5. Competent authorities should require the application of these sections if they identify signs of deteriorating asset quality. Competent authorities should consider the following elements and their interactions when assessing the applicability of sections 4 and 5:

a) increased inflows of NPEs;

b) a high or increased level of FBEs;

c) a high or increased level of foreclosed assets;

d) low coverage ratios;

e) breached early warning indicators;

f) an elevated Texas ratio;

g) the quality and appropriateness of workout activity.

All credit institutions should apply sections 6 to 9.

Credit institutions should comply with these guidelines in a manner that is appropriate to their size and internal organisation and the nature, scope and complexity of their activities; in particular, credit institutions may comply with sections 4 and 5 taking into account the proportionality criteria specified in section 4, Title I, of the EBA Guidelines on internal governance.⁽¹⁰⁾ Furthermore, if the credit institution is classified by the competent authorities for SREP purposes as SREP Category 3 or 4 (as assigned in accordance with the EBA Guidelines on common procedures and methodologies for the SREP⁽¹¹⁾), then the guidelines should be applied in a proportionate manner. The principle of proportionality in the application of these guidelines will relate in particular to simplified obligations for the operationalisation and governance arrangements supporting the NPE strategies of credit institutions (section 5).

These guidelines are addressed to competent authorities as defined in point (i) of Article 4(2) of Regulation (EU) No 1093/2010. The guidelines are also addressed to credit institutions as defined in point 1 of Article 4(1) of Regulation (EU) No 575/2013.

Unless otherwise specified, terms used and defined in Directive 2013/36/EU, Regulation (EU) No 575/2013,⁽¹²⁾ and Commission Implementing Regulation (EU) No 680/2014 (opens EUR-Lex in a new tab), as amended and in force, have the same meaning in the guidelines.

In addition and in particular, for the purposes of these guidelines, the following definitions apply.