Second line of defence controls
Second line of defence functions should perform controls on a continuous basis to check that NPE management in the first line of defence is operating as intended. To adequately perform their control tasks, second-line functions require a strong degree of independence from functions performing business activities, including the NPE WUs, and should have sufficient resources. They should have an adequate number of qualified staff. The qualifications of staff should be reassessed on an ongoing basis, and staff should receive training as necessary.
The second line of defence controls the implementation of risk management measures by the NPE WUs and should have a special focus on:
a) monitoring and measuring of NPE-related risks on a granular and aggregate basis, including in relation to internal/regulatory capital adequacy;
b) reviewing the performance of the overall NPE operating model, as well as elements of it (e.g. NPE WU management/staff, outsourcing/servicing arrangements, NPE reduction targets and early warning mechanisms);
c) assuring quality across NPE loan processing, monitoring/reporting (internal and external), forbearance, impairments, write-offs, collateral valuation and NPE reporting (in order to fulfil this role, second-line functions should have sufficient power to intervene ex ante on the implementation of individual workout solutions);
d) reviewing the alignment of NPE-related processes with internal policy and public guidance, most notably related to NPE classification, provisioning, write-offs, collateral valuations, forbearance and early warning mechanisms.
Risk control and compliance functions should also provide guidance on the process of designing and reviewing NPE-related policies and procedures and on the controls being established across NPE WUs. These functions should be involved in the design and review of the policies before they are approved by the management body.