The SSM and the prudential regime of non-performing loans

Abstract

In the aftermath of the global financial crisis, the rapid rise of non-performing loans (NPLs) showed the fragility of the banking system and the lack of harmonized regulatory regime to address the systemic risk of failing banks. The deterioration of NPLs in the balance sheet of credit institutions represents a real concern for the supervisory authorities and constitutes a challenge for regulators and market actors. This chapter examines the supervision of NPLs taking into consideration the architecture of Single Supervisory Mechanism (SSM) and the role of European Central Bank (ECB) to monitor non-performing exposures. The new supervisory toolkit implemented in the European Banking Union aims to improve the classification of asset quality and to establish common practices to resolve NPLs. This chapter argues that the intricate structure of the preventive measures to reduce the risk of lending defines a new landscape in the prudential treatment of NPLs.