Encourages a decrease in non-performing loans

Smaller banks are urged by the European Central Bank's supervision to display and manage delinquent loans online, noticeable progress needed with the current inventory.

, and Administrator

2025 September 17 . 8:10 PM

2 min read

European Central Bank calls for decrease in substandard loans

Encourages a decrease in non-performing loans

The European Central Bank (ECB) has published a draft guideline aimed at national supervisory authorities, calling on smaller financial institutions in the eurozone to address their legacy non-performing loans (NPLs). The public consultations on the draft are open until October 27, according to the ECB.

The ECB reported that the share of risky loans, where borrowers have fallen behind on payments, has decreased among banks over the past decade. However, some smaller banks still struggle to manage their legacy NPLs. In fact, at smaller banks, NPL ratios even began to rise again, albeit moderately, in 2024.

Legacy NPLs are loans where borrowers have fallen behind on payments. These loans remain on the balance sheets of some smaller banks for longer periods, and they have lower provisioning coverage compared to larger banks. This means they have less money set aside to cover potential losses.

The new guidelines will be phased in gradually from December 31, 2025, to December 31, 2028. Banks with very low levels of NPLs will be exempt from the new rules.

The downward trend in NPL ratios in the European banking sector stagnated in 2023, highlighting the need for action. The ECB stated that the draft guideline contains supervisors' expectations for the coverage of legacy NPLs originated before April 26, 2019.

The national supervisory authorities of all Eurozone countries responsible for the supervision of smaller banks are affected by the expectations published by the European Central Bank on October 27, 2024. The ECB made this statement in Frankfurt on Monday.

The European Central Bank reported that the share of legacy NPLs has decreased among banks, but some smaller banks still face challenges. The ECB has urged these banks to tackle their legacy NPLs to ensure the stability and soundness of the European banking sector.