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#EESC - Further measures to reduce non-performing loans are urgently needed

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The EESC welcomes the proposals concerning NPLs made by the European Commission, but recommends a specific impact assessment to ensure the suitability and effectiveness of the proposed measures.

The European Economic and Social Committee (EESC) strongly supports the introduction of additional measures at EU level to reduce the volume of non-performing loans (NPLs) and to prevent such loans from accumulating, thereby reducing the risk they pose for the solvency and stability of the EU financial system and EU economies. It is also vital to remove impaired debts from the financial institutions' balance sheets in order to avoid the consequences of over-indebtedness in the future and to enable banks to focus on lending to businesses and citizens.

Action is urgently needed, given that the total volume of NPLs, amounting to 813 billion euro in the last quarter of 2017, still remains well above pre-crisis levels and that the distribution of NPLs is uneven across the Member States (0.7% - 46.7%). The Committee therefore welcomes the proposals recently presented by the European Commission concerning NPLs.

"These proposals are a key piece in the EU's offensive to fight against the problem of non-performing loans. They will contribute to strengthening the Economic and Monetary Union and they are fundamental to moving towards the completion of the Banking Union", said Juan Mendoza Castro, rapporteur of the latest EESC opinion on the subject.

Although the proposed statutory prudential backstops can be justified by the different objectives pursued by the accounting framework relative to the prudential regulation, the EESC nevertheless questions the "one size fits all" approach and the calendar proposed for the provisioning of new NPLs. While the application of backstops should take the differences between national civil laws and the length of procedures in civil courts into consideration, the proposed approach would not do so. With regard to the calendar, the Committee is concerned that it will force banks to sell new NPLs quickly. This would be a drawback for the companies concerned.

"The proposed agenda could reduce the possibility of allowing for a debt restructuring and for giving entrepreneurs a second chance. This would also have a negative impact in social terms and on the employment ratio", said Mr Mendoza Castro.

The EESC therefore highly recommends assessing the potential impact of the proposed regulation on banks, on the transmission of credit to households, on SMEs and on GDP growth. The specific assessment would show whether the proposed regulation is suitable and effective or whether modifications are needed.

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In addition, the International Financial Reporting Standard 9 (IFRS 9) for financial instruments should be made mandatory, even if the proposed backstops may already mitigate the differences in provisioning stemming from the adoption of different accounting frameworks. The mandatory use of the same accounting standard could make backstops even more efficient.

The Commission is encouraging the development of secondary markets for NPLs through its proposal. Mendoza Castro said: "Regulators shouldn’t encourage the sale of NPLs. There is a risk that NPLs are being sold for a lower price on secondary markets than the value they could reach through a recovery within banks."

As regards the consequences of credit transfers, the EESC points out that the directive should ensure that responsible (national) authorities follow the specific measures and recommendations aimed at protecting debtors and workers.

Furthermore, the EESC opinion calls into questions the benefits of the proposed accelerated extrajudicial collateral enforcement procedure (AECE), as, in its view, the in-court enforcement process already works efficiently in many Member States. It also considers that the solution to the problem of NPLs lies mainly in strengthening judicial procedures in the EU, and not in the implementation of out-of-court procedures. Thus, the EESC welcomes the restrictions to the application of the AECE and the right for business borrowers to challenge its use before a national court.

Finally, the EESC urges credit institutions to ensure responsible and sustainable lending by paying greater attention to the needs and situations of their individual borrowers and by finding the financial instrument most appropriate to each borrower's circumstances. In this way they could contribute to the solvency and stability of the financial system and the resilience of the EMU to avert new financial crises and the resultant significant socio-economic consequences.

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