12 February 2025
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romania
A new era in NPL regulation
The past two decades have provided valuable lessons for the financial market, especially regarding banks' non-performing exposures (NPEs). During the first significant NPE cycle following the 2007-2008 financial crisis, European legislators were hesitant to implement measures to facilitate distressed debt trading by banks. However, when NPE ratios in banks' balance sheets were expected to rise again across the EU due to the COVID-19 pandemic, they quickly adopted an NPE Action Plan (COM/2020/822 final).
As part of the NPE Action Plan, Directive (EU) 2021/2167 on credit servicers and credit purchasers (the "NPL Directive") was adopted. Its principal aim is to ensure a functioning and liquid secondary market for distressed credit, while simultaneously ensuring robust debtor protection. This twofold focus is critical in balancing the need to offload NPEs from banks' balance sheets, without undermining the rights and protections of distressed debtors.
Recent data suggests that European legislators were right in acting and providing for a robust regulatory framework for sales of NPEs. According to the European Banking Authority's (EBA) Risk Dashboard, following the COVID-19 pandemic and economic disruptions caused by geopolitical changes, the average NPE ratio of banks in the CEE region has increased from pre-pandemic lows to approximately 2.1 %.
The regulatory framework introduced by the NPL Directive will be crucial in enabling banks to sell off NPEs, thereby lowering their current NPE ratios. Under the NPL Directive, banks are obliged to provide prospective purchasers with a wide range of data on the NPEs to be sold to facilitate prospective buyers' evaluation of the relevant NPEs and, thereby, boost buyer interest.
However, the NPL Directive does not only affect banks intending to sell NPEs. To safeguard the interests of distressed debtors, the NPL Directive imposes certain obligations on purchasers of NPEs as well, including to appoint a credit servicer and to report certain details about NPEs purchased to the competent authorities. Credit servicers (such as debt collection agencies) must obtain authorisation from a national competent authority to perform credit servicing activities in relation to NPEs. Additionally, credit servicers are subject to comprehensive ongoing conduct requirements, such as information obligations towards debtors, rules governing communication with debtors and rules on the outsourcing of credit servicing activities to third parties.
The deadline for the national transposition of the NPL Directive was 29 December 2023. Therefore, national implementation provisions should have been applicable from 30 December 2023, except for certain provisions, which apply from 29 June 2024.
Although only a few EU Member States transposed the NPL Directive on time, most EU Member States have adopted laws or at least have draft legislation under debate to implement the NPL Directive into national law.
Explore our NPL Directive Info Corner: Get an overview of NPL Directive transposition across the CEE region and access detailed guidance on key aspects of local implementation. Our dedicated NPL team covers a broad range of topics, offering valuable information for both sellers and purchasers of NPEs as well as credit servicers: schoenherr.eu/npl
authors: Martin Ebner, Loredana Barbu, Michael Schmiedinger
further reading
info corner
NPL Directive
This info corner offers insights into the current status of the NPL Directive adoption, and the implications for selling banks, credit servicers and purchasers under the new regulatory framework.
co-authors
