With the ongoing health crisis, European banking authorities fear an explosion in the number of non-performing loans (NPLs). They also fear an increase in so-called bad debts, which risk not being repaid. To limit the damage, the banks are calling for more flexible technical adaptations.
Changes to credit restructuring rules
European banks are calling for credit restructuring rules to be amended and made more flexible, and are currently seeking the agreement of the European Banking Authority, according to Les Echos newspaper.
At present, almost all restructured loans are classified as non-performing loans (NPLs), i.e. in default. These non-performing loans increase the cost of risk for banks, which are obliged to set aside provisions to cover these defaults.
The borrowers concerned are subject to stringent regulations, and their chances of obtaining a loan in the future are restricted. This automatically reduces the banks' capacity to grant new loans.
If a loan is in arrears for more than 90 days, or if the borrower is considered likely to default on the monthly repayments, even if there have been no arrears, the loan is considered non-performing.
The "probable absence of payment", which is sufficient to reclassify a loan as an NPL, has been clarified by the European Banking Authority. According to the Authority, the amounts paid by the debtor to the bank should vary by no more than 1% between the pre-restructuring and post-restructuring periods.
European Banking Authority reluctant to show flexibility
The banks are asking the European Banking Authority to raise this threshold to 5%, to allow renegotiation of loans and take account of the health and economic context.
This measure, which could only be put in place temporarily, is apparently not to the liking of the European authorities, who had already temporarily relaxed some rules in 2020.
As a result, until March 31, 2021, loans under moratoria benefited from a relaxation of regulations, and were not systematically reclassified as non-performing loans, as is normally the case. Banks have therefore been able to extend moratoria to businesses and individuals without impacting their balance sheets.
The issue of restructuring is also of concern to the Ministry of the Economy and Finance, which is currently negotiating with the European Commission to extend the duration of state-guaranteed loans, so that they can be repaid in 7 to 8 years instead of the current maximum of 6.