The European Central Bank (ECB) today launches a public consultation on a draft Guideline for a harmonised supervisory approach to the coverage of non-performing exposures (NPEs) held by less significant institutions (LSIs). LSIs are banks that are directly supervised by their national competent authorities (NCAs); and which are typically smaller than significant institution (SIs), which are directly supervised by the ECB.
While NPE ratios have significantly declined over the past decade, thanks in part to the common supervisory approach for SIs, some LSIs continue to face challenges in managing their legacy NPEs. This is reflected in NPE stocks which have remained on their balance sheets for longer and have lower coverage ratios compared with those held by SIs. Legacy NPEs constitute lasting sources of potential further losses and restrict banks’ capacity for new lending.
The draft Guideline addresses NCAs as the direct supervisors of LSIs. It focuses on ensuring sound risk management and consistent supervisory standards, while allowing NCAs to exercise supervisory discretion within the Pillar 2 framework. The ECB supports this through oversight, collaboration and information exchange to foster consistency across European banking supervision.