Regulatory environment

Concerns from regulators remain

The NPL topic has been in recent years a key priority for the European Central Bank (ECB) and national governments, resulting in successful deleveraging activities in the last decade. During the pandemic, the need to preserve the economies from the prolonged lockdowns has been met with a strong European support framework to the economies and businesses.

Concerns from the regulators remain that the real effects of the pandemic on banks’ credit risk might still be yet to come, as the benefits of the support measures erode. Such pressures on asset quality are also now being amplified by rising inflation, the prospect of recession, high energy costs, and the uncertainty resulting from the war in Ukraine. The main challenge for banks remains to understand the actual risks on credit exposures related to the various macroeconomic implications, but also the potential knock-on effects across the supply chains and industries.

As a result, EU banking supervisors are now putting a greater emphasis on sectors already vulnerable to the pandemic, expensing their focus to new conflict-related vulnerable sectors, monitoring sectors highly dependent on energy and raw material, and intensifying their oversight of exposures to leveraged transactions.

Regulatory activities likely to impact Europe’s NPL market

The ECB’s priority for 2022–2024 is to ensure that banks will emerge healthy from the pandemic. The key strategic objectives include a heightened focus on banks’ credit risk management practices, particularly for exposure to COVID-19 vulnerable sectors and leveraged finance.

The EU Directive on credit servicers and credit purchasers, which entered into force as of December 2021, aims at harmonizing the secondary market and increasing the market’s transparency using the European Banking Authority (EBA) data templates.

The new EU Directive on credit servicers and purchasers (the Directive on NPLs) officially entered into force on 28 December 2021. In addition to setting out authorization and supervision requirements for credit servicers, it calls for further standardization in the data requirements for sales of non-performing credit agreements.

The European Commission aims to further harmonize the regulation of Europe’s secondary NPL markets, facilitating cross-border risk-sharing, while protecting borrowers’ rights. This is expected to impact all the main actors involved in the sale process: originators, servicers and credit purchasers.

Credit servicers may be the most impacted by the EU Directive, as they will need to obtain an authorization in a home Member State before commencing activities in that territory. The Directive on NPLs introduces several other new requirements that will likely impact credit servicers.

Credit purchasers are not required to apply for an authorization unless they intend to perform the credit servicing operations themselves. If the borrower is a natural person, or a micro, small or medium-sized entity (SME businesses), a third country credit purchaser must appoint both an EU-domiciled representative and an authorized credit servicer.