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18 December 2018

European Council: Non-performing loans: political agreement reached on capital requirements for banks' bad loans


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The Council presidency and the European Parliament reached a provisional political agreement on capital requirements applying to banks with non-performing loans (NPLs) on their balance sheets. The deal will now be submitted for endorsement by EU ambassadors.


The proposal, initially put forward by the Commission in March 2018, aims at creating a prudential framework for banks to deal with new NPLs and thus to reduce the risk of their accumulation in the future. In particular, it provides for requirements to set aside sufficient own resources when new loans become non-performing and creates appropriate incentives to address NPLs at an early stage.

“The EU made important progress in recent years to make banks' balance sheets more sustainable and to reduce stocks of existing non-performing loans. However, a comprehensive framework to prevent their accumulation in the future was missing so far. That's what we are delivering today thanks to the agreement reached with the European Parliament.” Said Hartwig Löger, minister for economic and financial affairs of Austria, which currently holds the presidency of the Council.

A bank loan is considered non-performing when more than 90 days pass without the borrower (a company or a physical person) paying or unlikely to be paying the agreed instalments or interest. When customers do not meet their agreed repayment arrangements, the bank must set aside more capital on the assumption that the loan will not be paid back. This increases the bank’s resilience to adverse shocks by facilitating private risk-sharing, while at the same time reducing the need for public intervention. In addition, addressing possible future NPLs is essential to strengthen the banking union. It preserves financial stability and encourages lending to create growth and jobs within the Union.

On the basis of a common definition of non-performing loans, the proposed new rules introduce a "prudential backstop", i.e. common minimum loss coverage for the amount of money banks need to set aside to cover losses caused by future loans that turn non-performing. In case a bank does not meet the applicable minimum level, deductions from banks' own funds would apply.

Press release

European Commission: Banking Union: Agreement on measures to prevent the accumulation of non-performing loans



© European Council


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