Supervisory evaluation of management of NPEs and FBEs
As part of their ongoing engagement with credit institutions under the SREP, competent authorities should monitor the application of these guidelines by the credit institutions, in particular the development and implementation of NPE strategies and related governance and operational frameworks as described in sections 4 and 5. Competent authorities’ assessments should include, but not be limited to, whether the credit institution’s NPE strategy:
a) is embedded into the credit institution’s overall strategy and is subject to appropriate NPE governance, including a risk management and control framework;
b) relies on a credible self-assessment of the credit institution’s internal capabilities;
c) adequately takes into account the credit institution’s operating environment, external conditions and capital situation;
d) covers not only a short-term time horizon but also a medium- and/or long-term time horizon;
e) includes time-bound, realistic yet ambitious quantitative NPE targets and foreclosed assets targets where appropriate and is supported by an operational plan.
If the competent authority concludes that the NPE strategy of a credit institution clearly lacks one or more of the elements listed in points (a) to (e) of paragraph 235, it should be considered a serious shortcoming of the NPE strategy. In this case, competent authorities should require the immediate revision of the NPE strategy.
If the outcome of the competent authority’s assessment is that the requirements of point (a) to (e) of paragraph 236 are broadly fulfilled by the NPE strategy, but some deficiencies are identified, the competent authority should ensure that credit institutions present an action plan on how to address the deficiencies and establish an effective and timely NPE management framework.
Competent authorities should apply supervisory evaluation proportionately, taking into account the specificities of the institutions (e.g. in terms of size, nature and complexity). In their SREP assessments of NPE strategies and the supporting governance and operational arrangements, the competent authorities should consider also the business models of the institutions, in particular when the sole business of the institution is the purchase and sale of NPEs.
Proportionality in terms of the supervisory assessment of the NPE strategy of a smaller and less complex credit institution (e.g. an SREP Category 3 or 4 institution(40)) can be achieved by aligning the assessment with the SREP engagement model, which ensures a risk-based approach to supervision and takes into account the systemic importance of global and domestic institutions.
Competent authorities should challenge credit institutions’:
a) Operational plan and organisational arrangements if any of the following criteria is met:
The framework for identifying, measuring, managing, monitoring and mitigating NPEs and FBEs, including for early recognition of NPEs and appropriate workout activities, is deemed inadequate by the competent authorities considering the size and complexity of the NPE problem at the credit institution.
It does not allocate or does not foresee the future allocation of the necessary human and technical resources as well as providing for appropriate coverage by the internal control functions.
It does not adequately describe the operationalisation of the monitoring process for NPEs.
b) NPE strategy, if the combination of strategic options for the different portfolios and segments, including foreclosed assets, where applicable, does not result, in the authority’s view, in the most effective and efficient strategy for NPE reduction.
c) Capital plan, if it does not appropriately set out the planned reduction of NPEs from the balance sheet as per the NPE strategy and does not include suitable actions to ensure that a sufficient amount of capital and capital buffers are available, as well as envisaging timely and adequate impairments and write-offs.
d) Performance appraisal system, if the incentives for the management body and relevant managers and staff lack specific quantitative elements linked to the NPE reduction targets defined in the credit institution’s NPE strategy.
Considering the importance of early detection and prevention of deteriorating credit quality, competent authorities should assess whether the early warning mechanisms are implemented in the credit institutions’ internal procedures.
Competent authorities should assess if credit institutions: a) have in place a forbearance policy and related processes to assess the viability of forbearance measures and monitor the efficiency and effectiveness of forbearance measures;
b) recognise and classify NPEs and FBEs, including entry and exit criteria, consistently across the group and based on the definitions 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);
c) have in place policies and methodologies to ensure the measurement of impairments and write-offs for timely recognition of impairments and write-offs.
Competent authorities should ensure that credit institutions have appropriate written policies and procedures in place regarding the valuation of property, as described in section 9. In particular, competent authorities should verify that these policies cover all immovable and movable property types that are used to secure credit exposures, the criteria for the application of individual versus indexed valuation and the requirements with regard to eligible appraisers.
If credit institutions report material deviations from the operational plan in accordance with section 4.4, competent authorities should assess whether the proposed remediation actions are sufficient to eliminate the deviation from the plan. The competent authority should require further actions of the credit institution if it is concerned about the effectiveness of the proposed actions.
The requirements set out above regarding the supervisory evaluation of the management of NPEs and FBEs supplement and further specify the assessment of NPEs and FBEs as part of credit risk management put forward in the EBA Guidelines on common procedures and methodologies for the SREP. The findings of this supervisory evaluation would feed into the assessment of credit risk under Title 6.2 of the EBA Guidelines on common procedures and methodologies for the SREP and would inform credit risk scores.