NPL Data: Building Resilience NPL Data: Building Resilience

As EU authorities continue their focus on reducing Europe's overhang of non-performing loans (NPLs), banks face growing scrutiny on the quality and quantity of their NPL data. Requirements from regulators to improve data are evolving fast, raising concerns from banks on where to start to respond to this `moving target'. Achieving perfection is not realistic and is not what regulators expect. Instead, banks should take practical steps to enhance their NPL data and get them moving in the right direction.

Recent years have seen significant improvements in the resilience of the EU's banking sector. However, European regulators have emphasised the need for further progress, especially in the area of NPLs. Although the EU's average NPL ratio is falling, they are concerned that one third of EU jurisdictions still have NPL ratios above 10% EBA, Risk Assessment of the European Banking System, November 2017. Moreover, one of the key impediments to faster NPL resolution in Europe has recurrently been identified as information asymmetry and opacity.

In response to these concerns, the Council of the EU approved an action plan on NPLs in July 2017. Data is a crucial component of the plan, including the need to strengthen data infrastructure and work towards more standardised NPL data across the European banking system. Improving banks' loan book data is important at multiple levels for regulators; to ensure robust NPL strategies, to further foster the secondary NPL market and to support the valuation of banks in the context of resolution preparedness.

European banks need to respond to a number of key initiatives relating to their NPL data. In particular:

• Data for NPL management and strategy: Complete and reliable data is a prerequisite to the credibility of a banks' NPL strategy and perceived ability to manage their NPL risks. For example, as part of the implementation of the ECB guidance on NPL management (PDF 1.98 MB) published in March 2017, the SSM is requesting Significant Institutions (SIs) to produce the data underlying their NPL strategy and divestment plan. Moreover, on 8 March 2018 the EBA also published new guidelines for consultation on the management of non-performing and forborne exposures, which will be applicable to all supervised credit institutions in the EU. Adequate data is a cornerstone of these guidelines and National Competent Authorities (NCAs) are expected to begin implementing corresponding measures to supervise their banks.
• Data templates for transactions: The EBA published its standardised NPL data template in December 2017, to improve the volume and comparability of the data that investors need. While the use of the templates are voluntary, they are expected to become market standard to other regulatory initiatives (such as the AMC blueprint and EU transaction platform). They also make it easier for regulators to assess the adequacy of the data held by banks and challenge NPL strategy. Therefore, banks are strongly encouraged to familiarise themselves with these templates. 
• Data for resolution preparedness: Learning from recent bank resolution cases in Europe, inadequate data can cause significant hurdles in the event of sudden failure of a bank and make a valuation exercise extremely difficult to complete. Improving banks' data for resolution preparedness is therefore a priority of the SRB, to ensure that the necessary data is readily available in order to conduct credible valuations when required. While minimum data standards from the SRB are not yet in effect, we anticipate that banks will be required to maintain such information in a near future.

There is significant overlap between the data requirements of the regulators but it is equally clear that there is potential for differences to emerge, including between supervisory and accounting needs. For example, the ECB supervisory expectations to report on NPL provisioning may differ to the way NPL cash flows are monitored for IFRS 9 purposes. 

To facilitate implementation, European banks will be hoping that the various regulatory authorities are aligning their requirements, while also considering the existing regulatory reporting already performed by banks.

As these requirements come into focus, it is becoming obvious that European banks face significant data challenges.

Most banks' technology infrastructure is not yet able to automatically generate all the data required. Banks still need to gather a combination of electronic and paper information scattered across a range of platforms, markets, territories, and business units. The rapidly evolving requirements of the different regulators create additional uncertainty over the data banks need to curate and how frequently they should update it.

If not managed adequately, attempting to overcome these obstacles could be hugely complex and costly - even if banks were able address all their data requirements in a single project.

There will be no easy way for European banks to meet the fast-evolving regulatory requirements for NPL data. Instead of aiming for perfection, banks should assess where they can achieve simple, cost effective, and high impact fixes within their own limitations. To avoid either piecemeal fixes or adventuring into unwarranted changes, banks should perform a thorough gap analysis to assess the extent of their individual data problem and the underlying sources, considering both the current and foreseen regulatory landscape.

There will be no easy way for European banks to meet the fast-evolving regulatory requirements for NPL data. Banks can begin by assessing the level of critical fields of the EBA NPL templates they can produce, particularly for the data necessary for producing sound NPL strategies, and undertake targeted data remediation where relevant. Simple and automated market solutions are available to help banks with these exercises, such as KPMG's Deal Tech. But institutions need to make a start now - and ensure they are heading in the right direction.