Latest developments in the European NPL market

July 2022

On 15 May 2022, the European Banking Authority (EBA) launched a Consultation Paper (PDF 663 KB) on the draft Implementing Technical Standards (ITS) for non-performing loan (NPL) transaction data templates. The paper proposes new information requirements for sellers of NPLs to provide to prospective buyers. Banks are advised to review the proposed data requirements, to respond to the EBA by 31 August 2022, and to carefully assess the potential impact of the new templates.

Information asymmetry between sellers and buyers of NPLs remains an important driver of bid-ask spreads in European transactions of NPL portfolios. Improving the quality and consistency of NPL data has therefore been a key focus of EU regulators in recent years, including in 2020’s Action Plan which stressed the need for further standardisation in the information required for NPL sales.

As discussed in our previous article, the EBA was mandated by the Directive on credit servicers and credit purchasers (Directive (EU) 2021/2167 (PDF 932 KB)) to develop standardised data templates for credit institutions to use when providing information to investors during NPL sales. Leveraging the EBA’s existing voluntary NPL templates published in 2018, these new mandatory templates would be used by investors when conducting financial due diligence and valuation of NPLs.

The Consultation Paper on the Implementing Technical Standards (ITS) is now open for industry comments, which can be submitted until 31 August 2022. The draft ITS will then be finalized and submitted to the European Commission by the end of 2022. The templates are therefore only expected to enter into effect during 2023.

Once in use, the templates will apply to transactions involving loans that were originated on or after 1 July 2018 and which became non-performing after 28 December 2021. For loans outside this timeframe, credit institutions will still be expected to fill in the templates when conducting a sale, but on a best-efforts basis with the information available to them. It is worth noting that the templates will not apply to the securitisation of NPLs, or to the disposal of NPLs during sales of branches or business lines.

The objective of the draft ITS is to specify the data that credit institutions must provide to prospective buyers of NPLs. These include loan-by-loan information based on five templates covering:

1. Counterparty;
2. Relationship between the counterparty, loan and collateral;
3. Loan;
4. Collateral, guarantee and enforcement; and
5. Historical collection and repayment.

The templates include a total of 157 data fields, of which 133 are mandatory and 24 non-mandatory. The sellers of NPLs will be required to disclose the mandatory data points. They will also be encouraged to provide non-mandatory data but will be allowed to explain any unavailability.

The principle of proportionality will apply to the templates, with fewer mandatory data fields (91 instead of 133) for loans with a carrying amount below €25,000. In addition, different data fields will be applicable depending on whether the borrower is an individual or a company, and whether the loan is secured or not.

The proposal recommends that, due to the high sensitivity of the data contained in the templates, they should preferably be shared only at the beginning of the binding offer phase, and to prospective buyers that have signed specific non-disclosure agreements.

It is not yet clear how the use of the templates will be enforced, as there are no formal supervisory roles defined in the proposal. It is only stipulated that competent authorities may use the template as part of their supervisory activities. This absence of a clear enforcement framework leaves room for interpretation by supervisors. Sellers will therefore only know how their compliance will be assessed during their SREP.

It also seems likely that the new data expectations may extend beyond NPL sales. Supervisors may want to ensure that banks maintain the required data in their systems throughout the lifetime of loans, to ensure sound credit risk management and to make information available in the event of a sale. There are already multiple references to maintaining adequate NPL data in other regulatory texts, and the new ITS will only reinforce these expectations. For example, the EBA Guidelines on management of non-performing and forborne exposures (PDF 1.40 MB) (EBA/GL/2018/06) puts particular emphasis on enhancing the quality of non-perfoming exposure (NPE) data in order to prepare for future transactions. The EBA Guidelines on loan origination and monitoring (PDF 780 KB) also state that banks should consider using data fields from the previous EBA NPL templates when designing and maintaining their data infrastructure.

The ITS’s NPL data points therefore look set to become the new minimum standard for supervisors. Banks are advised to carefully review the new requirements and perform an internal review of data completeness. Submitting feedbacks to the EBA’s consultation provides the opportunity to raise concerns on the implementability and the potential impacts of these new templates. In addition, banks should consider how to address any significant gaps uncovered, in case they provoke future challenges from supervisors.