Reshaping legacy NPE management

ECB consultation: Managing legacy NPEs in Less Significant Institutions

In September 2025, the European Central Bank (ECB) launched a public consultation that could fundamentally reshape how Less Significant Institutions (LSIs) across the euro area manage legacy Non-Performing Exposures (NPEs). This initiative presents a strategic opportunity for LSIs to enhance credit risk management, align with evolving supervisory standards, and build resilience against macroeconomic challenges. Feedback on the consultation paper is required by 27 October 2025.

European Central Bank consultation paper on legacy Non-Performing Exposures in Less Significant Institutions

(PDF, 493KB)

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Why legacy NPEs matter

Legacy NPEs—those originated before 26 April 2019—continue to weigh heavily on the balance sheets of LSIs. While both LSIs and Significant Institutions (SIs) are exempt from Capital Requirements Regulation (CRR) deductions for legacy NPEs, only SIs have been subject to ECB supervisory coverage expectations. LSIs, in contrast, have operated under fragmented national approaches, resulting in inconsistent provisioning practices and persistent credit risk across the sector.

The ECB’s proposed supervisory framework aims to address two critical risks:

The prolonged presence of under-provisioned legacy NPEs, which restrict lending capacity and increase loss potential.
Inconsistencies in prudential treatment between CRR-deductible and non-deductible NPEs, absent clear justification.

Unlike SIs, which have made measurable progress in reducing NPE ratios, LSIs often face structural and operational constraints—including limited resources, legacy systems, and varying supervisory expectations. These factors contribute to the persistence of legacy NPEs as a source of credit risk and supervisory focus.

Understanding the ECB’s proposal

The ECB has released a Draft Guideline proposing a harmonised supervisory approach for managing legacy NPEs in LSIs. Developed in collaboration with National Competent Authorities (NCAs), the framework is designed to be both risk-based and proportionate. It enables NCAs to tailor its application based on each institution’s risk profile and operational context, allowing for exemptions under specific conditions while maintaining supervisory discretion.

The Guideline proposes a phased implementation from 31 December 2025 to 31 December 2028, providing LSIs with a structured timeline to adjust provisioning strategies, strengthen internal controls, and engage with supervisory authorities. LSIs will be required to report detailed NPE coverage data using templates developed by the ECB and NCAs, supporting the ECB’s oversight function and promoting consistency in supervisory evaluations across jurisdictions.

For LSIs, the proposal provides a clear framework to enhance credit risk management, align with euro-area supervisory standards, and reinforce resilience amid shifting regulatory and macroeconomic conditions.

Strategic implications for LSIs

The ECB’s consultation is more than a compliance exercise—it signals a strategic inflection point for LSIs. By proactively engaging with the proposed Guidelines, institutions can strengthen their resilience against credit deterioration and macroeconomic shocks. This is particularly important in today’s environment of geopolitical uncertainty, inflationary pressures, and climate-related risks.

From a strategic perspective, the Guideline encourages institutions to take a forward-looking approach to risk management. Legacy NPEs are no longer static issues—they are active risk factors requiring continuous attention. Addressing them now can lead to stronger provisioning practices, more effective capital planning, and improved stakeholder confidence.

Aligning with euro-area supervisory standards also enhances transparency and credibility. As expectations from investors, rating agencies, and regulators continue to rise, consistency in credit risk management is becoming a key differentiator for institutions seeking to maintain trust and competitiveness.

Key features of the guideline

Strengthen credit risk management: Reassess provisioning strategies and internal controls for legacy NPEs more effectively.
Enhance capital planning: Model the financial impact of supervisory coverage expectations to inform forward-looking capital strategies.
Improve regulatory alignment: Demonstrate commitment to supervisory best practices and transparency, reinforcing trust with key stakeholders.

The Guideline applies to all LSIs at the highest level of consolidation as assessed by NCAs. However, NCAs may grant exemptions if any of the following specific conditions apply:

NPLs represent less than 5% of total loans and advances.
In-scope NPEs are an insignificant share of total NPEs.
The LSI is in wind-down, or subject to merger or acquisition.
The LSI is classified as a specialised debt restructurer.
Other circumstances, as assessed by the NCA, make the Guideline’s application inappropriate.

Exposures from traditional or synthetic securitisations are excluded if either of the following conditions is met:

The institution has transferred significant credit risk to third parties.
The institution has fully deducted the securitised exposures from its capital.

NCAs may exempt specific exposures upon request, provided the LSI presents robust supporting evidence. Valid exemption cases include:

Loans with regular repayments, expected to fully amortise.
Combined NPE coverage and Pillar 1 capital requirements for credit risk exceeds 100% of the exposure being covered.
Exposure relates to technical guarantees—i.e. guarantees covering non-financial obligations.

NPE coverage assessment and reporting

NCAs will assess the adequacy of NPE coverage in LSIs using the methodology outlined in Article 47c of the CRR. Expected loss is determined by applying time-sensitive regulatory factors to the secured and unsecured portions of each exposure, with transitional factors of 0.60, 0.70, and 0.80 applying from December 2025 through December 2027.

Actual coverage includes specific credit risk adjustments, write-offs, purchase price discounts, and other funds reductions applied to the exposure. Where expected loss exceeds actual coverage, NCAs shall assess whether the coverage is adequate. These assessments form part of the Supervisory Review and Evaluation Process (SREP) under Article 97 of the Capital Requirements Directive (CRD).

If coverage is deemed insufficient, NCAs may apply supervisory measures under Article 104 of the CRD, such as requiring additional capital or provisioning. To enable this assessment, LSIs must report detailed coverage data for each reference date using templates developed by the ECB in cooperation with NCAs. This data is shared with the ECB to reinforce supervisory consistency and oversight.

How KPMG can support you

KPMG offers a comprehensive suite of advisory services to help institutions navigate the ECB’s supervisory framework for legacy NPEs. Our support is structured around three core pillars:

Diagnostic review & gap analysis: Benchmarking current provisioning policies, reviewing internal systems, and identifying gaps in NPE treatment and reporting.
Scenario modeling & strategic planning: Financial simulations, exploring alternatives, and supporting strategic decision-making.
Regulatory engagement & implementation support: Facilitating communication with regulators, preparing exemption requests, and setting up reporting systems aligned with ECB templates.

Let’s turn regulatory change into strategic opportunity—KPMG is ready to support your next step.

If you have any queries related to the ECB’s consultation on legacy NPEs, or would like to discuss how your institution can proactively align with the new supervisory framework, please contact our team. We’d be delighted to hear from you.