Apparently EBA chose a relatively friendly route here, as it offers banks to report NPL and forbearance via FINREP, a reporting tool that is close to financial reporting. Bank also will have to report via COREP, and COREP determines the solvency calculations of banks directly.
Here is EBA’s justification for not tampering with the solvency rules, that is, for now. See the standard pages, 38-39.
“The definition of non-performing exposures The variety seen in the responses received regarding the impairment and default practices shows that the definition of non-performing exposures remains necessary as an important first step to move the current state of play towards more harmonisation of the concepts of non-performing and to build a harmonised asset quality index immune to too much variety stemming from differences in implementation, including the use of options available in the Regulation (EU) 575/2013 (‘ the CRR ’). The work on the default concept as forecast in the CRR will later on complement this first step.”
“The definition of non-performing exposure does not seek to override the flexibilities left to institutions in the CRR, as the definition does not replace the default and impairment definitions. By building on the definition of default with extra criteria for harmonisation, the definition instead conciliates these flexibilities with the need for a more harmonised asset quality indicator across the EU. The definition of non-performing exposure achieves harmonisation without directly affecting an institution’s solvency or profitability (since not all non-performing exposure will necessarily be impaired/defaulted). Resorting to harmonisation of default may not have the same implications for the profitability/solvency of institutions.”
Hopefully this will work for now, may the future tighten the standard up to increase its bite.
- Plan Would Define Bad Loans at Europe’s Banks (online.wsj.com)
- European bank regulator sets loan test rules (telegraph.co.uk)
- ECB Urged to Use Single Rule on Bad Debt for Bank Exams by EBA – Bloomberg (bloomberg.com)
- Jay! EBA publishes standards on NPL, Forbearance, and AQR (capitalissues.co)