The European Banking Authority and the European Central Bank have written to the European Commission, the European Parliament and the Council of the European Union expressing concerns about the impact of proposed data waivers for non-performing loans. The letter refers to a proposal put forward by certain stakeholders, in particular the Bank of Italy, that losses due to the sale of NPLs should be permanently eliminated from the dataset used for the Loss Given Default (LGD) estimation for the firm disposing of the NPLs. The proposal is based on the belief by some stakeholders that the disposal of NPLs and the corresponding capital release is hindered by the regulatory framework for internal models, in particular the requirements in the Capital Requirements Regulation for LGD estimation.

The EBA and the ECB do not support the introduction of such data waivers and argue that the losses should be appropriately reflected in the assessment of risk. The EBA and ECB do not consider that the build-up of NPLs in the EU banking sector is extraordinary because it has taken place in other cyclical downturns. Furthermore, the EBA and the ECB are of the view that the introduction of the proposed waiver would lead to an underestimation of LGD and inadequate capital requirements. This would provide preferential treatment to banks which have accumulated high levels of NPLs, creating regulatory arbitrage. Finally, the EBA and ECB highlight that the current regulatory regime already allows waivers where appropriate.

View the letter.

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