non-performing loans

EMU: European Commission Publishes Reports on Progress

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The European Commission has recently published the following documents, accompanied by a series of press releases and fact sheets:

  • Communication, Deepening Europe’s Economic Monetary Union (EMU): Taking stock four years after the Five Presidents’ Report.
  • Staff Working Document, Strengthening the International Role of the Euro, Results of the Consultations.

Related to these documents, the Commission published a Communication, Fourth Progress Report on the reduction of non-performing loans (NPLs) and further risk reduction in the Banking Union.

Third European Commission Progress Report on Reducing NPLs in EU

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On November 28, the European Commission published a communication setting out its third progress report (COM(2018) 766 final) in reducing non-performing loans (“NPLs“) and further risk reduction in the banking union.

There is an overall trend of improvement, with NPLs declining to an average of 3.4% which is approaching pre-crisis levels, due to action taken by member states and market players. However, there are high NPL ratios still in some member states.

The Commission has delivered all elements of the Council’s July 2017 NPLs action plan. However, it needs to be fully implemented by all actors in order to address the challenge of high NPLs, both in terms of reducing existing stocks to sustainable levels and preventing future accumulation. In particular, the Commission calls on the European Parliament and the Council of the EU to swiftly agree on the banking risk reduction package and all the elements of the legislative proposals to tackle NPLs.

A staff working document (SWD(2018) 472 final) was produced at the Council’s request and following collaboration with the European Central Bank (“ECB“) and the European Banking Association (“EBA“). The document, which is stated to not represent the views of the Commission, the ECB or the EBA, consider the set-up of an EU NPL electronic marketplace platform where banks and investors could trade NPLs to help stimulate development of the secondary market.

Joint Committee of ESAs Report on Risks and Vulnerabilities in EU Financial System

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The Joint Committee of the European Supervisory Authorities (“ESAs“) (that is, the EBA, EIOPA and ESMA) published its spring 2018 report (JC 2018 07) on risks and vulnerabilities in the EU financial system on April 12, 2018.

The Joint Committee identifies the following as the main risks to the EU financial system:

  • Brexit. Uncertainties around the terms of the UK’s withdrawal from the EU could expose the EU27 and the UK to economic and financial instability and weaken market confidence, particularly if negotiations end in a disorderly way. The lack of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and the continuity of financial contracts, and create operational challenges.
  • Cyber risks. These risks threaten data integrity and business continuity and are particularly dangerous because of possible multiplier effects leading to further business risks such as supply chain risk and reputational risk. Similarly, risks related to virtual currencies and crypto-assets have recently materialised.

The Joint Committee published a report in March 2017 noting that the growing use of big data could increase the risk of harm from cyber attacks.

  • Asset repricing. The risks related to valuations and repricing of risk premiums could reduce profitability and asset quality across sectors. Asset quality in the banking sector has recently improved and volumes of non-performing loans (“NPLs“) disposals are increasing. However, the amount of NPLs on banks’ balance sheets remains high, which needs to be addressed by banks and supervisors.

The Joint Committee’s spring 2017 report on risks and vulnerabilities in the EU financial system warned that the banking sector was being affected by high levels of NPLs.

  • Climate change and the transition to a lower carbon economy. This raises concerns about the sustainability of investments across large parts of the financial sector. Climate change can affect asset quality through different transmission channels, which could in turn affect the solvency position of financial institutions.

In the light of the risks identified, the Joint Committee recommends a series of policy actions by the ESAs, national competent authorities and financial institutions. These recommended actions are set out in the report.

The Joint Committee previously reported on risks and vulnerabilities in the EU financial system in September 2017.

Rating Agency Developments

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On August 16, Moody’s supplemented its approach to rating residential mortgage-backed securities (RMBS) in China. Report.

On August 16, Fitch updated its country ceilings cross-sector criteria report. Report.

On August 16, Fitch updated its criteria for rating sukuk. Report.

On August 15, Moody’s updated its rating methodology for U.S. charter schools. Report.

On August 12, Fitch published its U.S. residential mortgage-backed securities (RMBS) non-performing loans rating criteria. Report.

On August 12, Fitch updated its solid waste revenue bond rating criteria. Report.

On August 11, Fitch updated its criteria for rating currency swap obligations of an SPV in structured finance transactions and covered bonds. Report.

On August 11, Fitch updated its criteria for rating tolled roads, bridges and tunnels. Report.

On August 11, Moody’s updated its approach to rating securities backed by FFELP student loans. Report.

Rating Agency Developments

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On August 2, 2016, Moody’s issued a report entitled: Moody’s Approach to Rating Securitisations Backed by Non-Performing and Re-Performing Loans.  Report.

On August 1, 2016, S&P issued a report entitled: General: Global Methodology for Rating Retranchings of ABS, CMBS, and RMBS.  Report.

On July 29, 2016, DBRS issued a report entitled: Global Methodology for Rating Banks and Banking Organisations.  Report.

On July 28, 2016, Fitch issued a report entitled: Fitch Updates Global Rating Criteria for CLOs and Corporate CDOs.  Report.

On July 28, 2016, Fitch issued a report entitled: Fitch: No Rating Changes from Update to Global LMI Criteria in RMBS.  Report.