Prepared by Cristian Sgaramella, Roberto Percoco, Valeria Saponaro and Adele Zuliani
Article 16 of the EU Directive 2021/2167 has assigned the European Banking Authority (“EBA”) the task of developing new criteria, so-called Implementing Technical Standars (“ITS”), so that all credit institutions, subject to the provisions of the CRR Regulation, interested in the sale of NPLs, provide more detailed information on their credit exposures. On 16 December 2022, the EBA published a draft document, based primarily on templates voluntarily proposed by market participants, with the aim of providing a common data standard that can be used in NPL divestment transactions.
The model presented by the EBA realises the need to address the information asymmetry between sellers and buyers operating in the market, which has been identified as a major obstacle to the development and functioning of NPL secondary markets in the European Union. In fact, having standardised information, through the use of common templates, would facilitate the successful conclusion of the transaction by removing barriers to entry for smaller credit institutions.
Keeping in mind the objectives summarised above, the draft document is divided into four chapters, devoted respectively to: (i) identification of common objectives and definitions; (ii) information to be provided; (iii) operational implementation procedure and confidential information; and (iv) final provisions. Finally, the document is complemented by a glossary of data and instructions for compiling them.
As far as the first section is concerned, the EBA’s wish is the use of a common template as a response to the need to provide proportionality in the market by establishing mandatory disclosure requirements, depending on both the category of loans included in the NPL portfolios to be sold and the nature of the borrowers. In fact, in the EBA’s view, in order to facilitate compliance with the principle of proportionality, as well as to respect existing market practice, in some cases, the use of such templates could create a crucial imbalance. In fact, the circumstances in which the use of the models is optional are specified below: (i) single non-performing loans; (ii) different credit lines linked to the same Borrower; (iii) non-performing loans consisting of “syndicated loan facilities”; (iv) non-performing loans linked to a non-EU domiciled entity; and (v) transfer of non-performing loans between credit institutions belonging to the same group.
The second part of the document represents the minimum content to be included in the data tape in order to allow the acquirer to easily recognise the core of the transaction, with the possibility that, at a later stage, this outline may be optionally implemented with additional and further information linked to the specific characteristics of the transaction. From a general perspective, the data tape should contain information on the loan and its contractual characteristics; as well as on any collateral and personal guarantees provided, the legal and enforcement procedures in force, and the historical collection of the expected amortisation schedules.
In particular, the data tape proposed by the EBA is organised with the following “templates”: a) counterparty (it will have to contain information regarding the identification of the counterparty group, i.e. the counterparty, identifying which entity assumes the role of “Borrower” or “protection provider”) and the relationship between the collateral provided and the credit; b) credit line (it will have to contain contractual information, including any agreements that may have been entered into); c) collateral, personal and enforcement procedure; d) historical collection information (it will include all information on collections that have occurred in relation to a minimum period of 36 months prior to the cut-off date).
Again, the draft ITS in its third chapter sets out the requirements for the handling of personal data and confidential information to be exchanged between potential purchasers and credit institutions, highlighting the need for the latter to ensure that the completeness and accuracy of the information provided is guaranteed. In this regard, the EBA points out that the requested information may include elements that are considered confidential and therefore subject to European legislation on data protection and/or banking confidentiality. It will be up to the respective credit institutions involved in the transaction to determine which information is to be considered ‘confidential’ (and therefore not shareable) in accordance with the relevant legislation.
On a practical level, pursuant to Article 16(7) of Directive (EU) 2021/2167, the templates specified in this draft ITS are to be used for loans originated on or after 1 July 2018 and becoming non-performing after 28 December 2021. In addition, the EU expectation is that information on NPLs will be provided by potential originators early enough in the sale process to allow potential buyers to make their assessment before committing to the transaction.
Finally, it is noted that although no formal role is assigned to authorities in monitoring the use of the draft ITS model at the time of the transfer of NPLs, competent authorities may assess the availability of the information by the entities and the use of the model in the context of supervisory activity and credit risk assessment by institutions.
In consideration of the indications provided by the EBA, it is possible to consider this document as a further step towards the definition of a unified regulatory framework for NPL credits: in fact, the ITS draft provides a common standard for NPL transfer transactions, with an additional possibility for smaller credit institutions to access the market more easily.
The draft is expected to be approved by the European Commission and then published in the Official Journal, to take effect 20 days after its publication.
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