Ms Gráinne McEvoy:

I thank the Chairman and members for the invitation to discuss the proposed measures published by the European Commission in March 2018 aimed at addressing the resolution of non-performing loans, NPLs. I am joined by my colleague Mr. Adrian Varley, head of the banking supervision: analysis division.

I will provide an overview of the recently published Commission package on non-performing exposures, NPEs, which was released in March 2018. The proposals are a key aspect of the Commission’s commitment to delivering on the Council of the EU’s action plan on NPLs of July 2017. The package comprises two legislative proposals: first, a proposal for a regulation amending the capital requirements regulation, CRR, which introduces minimum coverage requirements for incurred and expected losses on future non-performing exposures, NPEs, arising from newly originated loans; and, second, a proposal for a directive on credit servicers, credit purchasers and the recovery of collateral. Discussions on the proposals in the context of the European policymaking process are at an early stage. The Central Bank of Ireland is evaluating the potential impact these proposals will have on the Irish market. The Central Bank is also providing technical advice to the Department of Finance as part of these political negotiations and will continue to engage as discussions progress.

The level of NPLs increased significantly following the onset of the economic and financial crisis in 2007. High levels of NPLs pose a significant threat to economic stability and to the orderly functioning of the banking system throughout the EU. High levels of NPLs also result in loss of confidence in banks, making it harder for them to raise capital, borrow, reduce interest rates and make new loans to businesses and households. Loan sales can play an important role in transferring risks from banks to other types of investors, which reduces vulnerability in the banking system.

The Central Bank engages both at the European level within the European Banking Authority, in its standard setting capacity, and European Central Bank, ECB, Single Supervisory Mechanism, SSM, in its supervisory capacity, and at a domestic level via direct supervisory engagement with the banks to assist in the proposed responses to NPEs. The specific proposals at hand will be subject to significant scrutiny as part of the European legislative process and are likely to be amended considerably in advance of their implementation into law.

The proposals aim to prevent the build-up of high levels of NPEs on banks' balance sheets, through the incentives produced by increased provisioning requirements, and to develop secondary markets for NPEs, with the aim of removing undue obstacles to loan servicing by third parties and to the transfer of loans to third parties. The package also aims to enhance the speed of recovery of collateral for business loans through the introduction of an accelerated extrajudicial enforcement procedure, AECE.

The Commission's proposal for a regulation establishes a minimum coverage requirement whereby banks must put aside certain amounts to cover incurred and expected losses caused by loans that turn non-performing. Where the bank does not meet the applicable minimum level, it will have to make a deduction from own funds. The minimum coverage requirement increases gradually depending on how long the exposure has been classified as non-performing.

The proposal sets out different coverage requirements for secured and unsecured exposures. When an NPE is secured, the required coverage levels for the secured part of the exposure can be phased in over a period of eight years, while unsecured exposures will be phased in over two years. The Commission's reasoning for this differentiation is that recovery rates are on average significantly higher for secured NPEs than for unsecured ones.

It is also proposed that there would be different levels of coverage required depending on the criteria under which the exposure is classified as non-performing, for example, whether it is past due or borrowers are considered unlikely to pay.

Concerning the minimum coverage requirement, the Central Bank is broadly supportive of the policy direction of the Commission's proposal. Without supervisory challenge, banks have been inclined to employ a wait-and-see approach with respect to provisioning, which means that new NPLs can build up to cause bank-specific or system-wide problems. The Commission's proposal, which would apply only to new loans originating after 14 March 2018 that become non-performing, would ensure that banks had suitable levels of provision. If the latter is not the case, they must hold appropriate capital in respect of this risk.

The second aspect of the package is a proposal from the Commission for a directive on credit servicers, credit purchasers and the recovery of collateral. The proposal standardises the regulatory regime by seeking to harmonise the definition, authorisation, supervision and conduct rules applicable to credit servicers and purchasers. This legislative initiative aims to develop secondary markets for NPLs further, with the aim of removing undue barriers to loan servicing by third parties and to the transfer of loans to third parties.

The standardisation of a regulatory regime for credit servicers and credit purchasers is broadly supported, as the proposal states that the assignment of creditors' rights under the credit agreement should not affect the level of protection to consumers in any way. To this end, the proposal provides that consumer protection rules will continue to apply in order to ensure the same level of protection irrespective of who owns or services the credit and irrespective of the legal regimes in force in the member states of the credit purchasers and credit servicers. This high-level principle mirrors the objectives of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015, which sets out the regulatory regime in respect of credit servicing firms and brings them into the Central Bank's regulatory remit. Furthermore, the proposal does not require that credit purchasers must be directly authorised or regulated, but that they must appoint credit servicers or credit institutions that are regulated. This is in line with the current legislative regime in Ireland, which requires an unregulated loan owner to appoint a credit servicing firm that is authorised and regulated by the Central Bank. Credit servicing firms are subject to the Central Bank's statutory codes and regulations.

The second part of the proposal also aims to enhance the protection of secured creditors by introducing a more efficient method of realisation of security, called the accelerated extrajudicial collateral enforcement, AECE, procedure. The aim of the AECE procedure is to increase the efficiency of debt recovery through the availability of an accelerated mechanism for the recovery of collateral for creditors of business borrowers only. This procedure would be accessible when agreed upon in advance by both the lender and borrower. It is not available for consumer loans or real estate serving as the borrower's primary residence and may only be effected where it has been explicitly stipulated in the original loan contract. While banks can enforce collateral under national insolvency and debt recovery frameworks, the process can be slow and unpredictable in some countries. The proposed mechanism is intended to introduce a more efficient mechanism while balancing the interests of creditors and borrowers.

I thank members for their attention. We look forward to addressing their questions.