Welcome to the ECB ladies and gentlemen and to this public hearing on the draft addendum to the ECB guidance on to banks on non-performing loans I'm Connie Lotza of the ECB's communications department So this hearing is being webcast live and a transcript of it will be posted on our website later on The consultation on the addendum as you know will end at midnight on December 8th So you can still submit comments inviting as well then until then let me introduce our speakers Next to me is Danielle Nui the chair of the ECB supervisory board Next to her Sharon Donnery deputy governor in the central bank of Ireland and chair of the ECB's high-level group on NPLs To Sharon's right is Anne Frölling ECB head of section and part of the team Coordinating the work on NPL guidance and last but not least to the far right is Sharon Finn ECB advisor and a member of the NPL task force project team Miss Nui and Miss Donnery will make introductory statements before we will turn to the floor to your questions and comments Danielle, please Thank you, Connie. Good morning to all of you or also that I should say good afternoon. We are after noon indeed It's a pleasure to welcome you to today's public hearing here at the ECB in Frankfurt This event is part of a public consultation on the draft addendum to our guidance to banks on non-performing exposures as Expected there is a lot of interest in this hearing Non-performing loans NPLs for short have become one of the most widely discussed issue in the European banking sector This is not surprise considering the sheer volumes of NPLs which reach around 1 trillion euro at this peak As a banking supervisor I welcome the fact that NPLs receive so much attention after all they do pose a major problem First of all they wait on the balance sheet of banks curbing their profits That's a problem as European banks suffer from a lack of profitability anyway Second NPLs are distracting on represent a drain on resources for instance, they absorb the time on energy of bank staff on management Who could be employed more usefully on tasks such as adapting their banks business model to the fast changing environment? Third NPL undermine trust in a bank How much trust would markets on investor have in a bank that is weighed down by ice talks of NPLs? In short high levels of NPLs weaken a bank and keep it from doing its job On that job is broadly speaking to finance the economy As the president of the ECB stated at the ECB forum on banking supervision on 7 November I quote internal ECB analysis shows that over recent years Banks with ice talks of NPLs have consistently lend less that banks with better credit quality Therefore providing less support to firms on households end of quotation So at the end of the day NPLs are not just a problem for the affected banks. They are a problem for the entire economy The good news is that some progress has already been made Since 2015 the ratio of non-performing loans in the euro area has gone down from around 7.5% to around 5.5% in absolute term. This is a decrease of around 200 billion However, that's just an average. There are parts of the banking sector where NPLs stocked are still far too high This issue needs to be resolved. That has been one of our supervisory priority Priorities right from the start. Our comprehensive assessment back in 2014 Helped us to gauge the size of the problem In 2015 we set up a high-level working group whose job was to devise a joint supervisory approach And the colleagues involved had done a great job. I thank them for that They have developed an approach which is genuinely European It aims to ensure a level playing field across the euro area In March this year we publish our qualitative guidance to banks on non-performing loans It sets out the way in which banks are encouraged to deal with non-performing loans It should help them to draw up plans which are ambitious yet realistic On which are backed by adequate governance structures Using these guidance as a reference our joint supervisory team have assessed the banks plan In short, we expect banks to deploy a diversified set of tools to reduce NPLs Such as cures, sales and write-offs We expect them to reduce the NPL steadily year by year And we expect the envisaged level of provisioning to be in line with the underlying strategy For example with regard to the sales at current market prices Reducing the high stocks of NPL is the first step Banks must also ensure that the problem does not recur And this forward-looking approach is supported by our draft addendum to the guidance The draft addendum clarifies our supervisory expectations in respect to the provisioning of loans That become non-performing in the future So to be very clear we are not talking about existing NPLs here We are not talking about the stocks The main purpose of the draft addendum is to make our approach transparent And I would like to mention something which has sometimes be misunderstood Our expectations are firm, but there are no automatic actions attached to them We will discuss provisioning with each affected bank And we will duly consider the clarification as well as the specific circumstances of each bank If we are content with the clarification then no further action will be proposed However, if we are not convinced and believe that the bank's provision do not adequately cover the credit risk We may consider supervisory potential measures under the pillar two framework The ECB plays an important role in resolving NPLs and in doing so we take an intrusive approach But also a fair one This consultation demonstrates that we are interested in listening to all stakeholders before we take action However, we are not the only ones that can and should take action What we need is a joint effort which also involves the banks, regulators and national governments As well as European institutions Our easily NPLs can be resolved also depends on the national legal and judicial systems On here we see many differences between euro area countries The time required to resolve NPLs in court for instance varies considerably And in some countries there are no specialized courts or judges to deal with unsolvencies In addition, faster out-of-court state settlements are not available as a tool in every country All these slows down the resolution of NPL and it could all be addressed by national government Given that we live in a banking union, we should aim for a system which makes it just as easy to resolve an NPL in one country of the euro area as in any other Thank you for your attention. And now I will hand over to Sharon Donnery, the chair of the high-level group on non-performing exposures Thank you Danielle and good afternoon everyone So direct engagement with the public through the consultation process and through our public hearing today Allows us to listen and benefit from your insights and helps to promote trust We welcome the comments already provided from the European Parliament and the Commission and the feedback We have received from some other relevant stakeholders so far Some I believe have viewed the draft addendum in isolation However, I think it's important to recall that what we are consulting upon today is a non binding draft addendum to the Qualitative guidance that we published on 20th of March It's worth recalling that the qualitative guidance I refer to Requires banks to amongst other things establish bank specific strategies which lay out their individual approach and objectives for NPL management in this context Significant institutions need to take into account the bank specific operating environment Bank specific internal NPL capabilities and embedding their own bank specific strategy into management processes Without an appropriate governance structure and operational setup Banks will not be able to address their NPL issues in an efficient and sustainable way and this matters regardless of whether We are talking about the stocks of NPLs or new NPLs as they emerge Banks have the responsibility to ensure that they have adequate internal control mechanisms to promote sound and efficient risk management And this means dealing with their stocks of NPLs in a deliberate and determined manner It also means ensuring that they are prepared for any build-up of NPLs in the future the issue that we are here to discuss today Now the ECB for its part in this context as an intrusive supervisor Also has the responsibility to ensure banks have efficient provisioning methodologies and processes Which should ensure that their NPL related risks are adequately covered and We have the responsibility to set clear expectations to that effect So the addendum reinforces the qualitative guidance and I think is the context in which it should be seen More specifically the addendum sets out in a clear and transparent way our supervisory expectations for Prudential provisioning of new NPLs The draft addendum outlines that fully unsecured NPLs will generally be expected to be fully provisioned after two years of vintage And full prudential provisioning should generally be expected after seven years for fully secured exposures We have calibrated our expectations taking into account international best practice the results of our stock take on national practices with regard to legal judicial and extra judicial elements and supervisory judgment This is part of normal supervision It's also important to note that the draft addendum is not in itself a pillar to measure But following supervisory dialogue and taking into account bank specific circumstances Its implementation may result in individual pillar to measures for certain banks The draft addendum provides an indication of what the ECB expects from banks when we conduct the assessment of the risks They are exposed to The accounting position of a bank serves as a starting point for the supervisory dialogue in determining whether a bank has adequately covered From a prudential perspective its credit risk exposures These and other CET one adjustments are then compared with the supervisory expectations in the draft addendum Banks are expected to discuss their approach to provisioning and collateral with respect to our supervisory expectations The ECB will give due consideration to a bank's position compared with our expectations and in view of the specific circumstances of that bank If through this process the ECB still considers that the banks provisions do not adequately cover credit risk a Supervisory measure under the pillar to framework may be considered However, if the ECB is satisfied with the explanations no further action is proposed At the risk of oversimplification it can therefore be viewed as a three-stage process First as a transparent supervisor we have set out in a clear and consistent fashion our supervisory expectations Second we will undertake our analysis of the bank specific circumstances strategies governance and operations Recognition the accounting position and banks comments in the supervisory dialogue and so on against these expectations Third these will be executed on a case-by-case basis and our results will be incorporated in the bank specific Shrep decisions Because working out NPLs requires concerted action by many stakeholders It's important to note that we welcome work being done in other fora including the ecofin action plan Just previously mentioned our work will not stop here And we will bring for their further proposals to deal with the stocks of NPLs in Q1 2018 However, today is about the draft addendum which we have published and we welcome your questions on this item. Thank you for your attention Thank you both. So we'll come to your questions and comments now We have microphones here that we would direct to you when you raise your hands and we would ask you Please to state your name and affiliation So please in the front here Good afternoon. Thank you very much. Madam Dennery and Madam Nui Eric Lucille, managing director with KPMG As you know one of the questions that banks might have it's about the operational complexity of the scourge expectations So will the will the expectations Be targeting the specific exposure in terms of report reporting or more at the portfolio level Thank you Well, let me start responding that the complexity is not that big because what the eco-fine measures Recommending is a pillar one measure that will take some time to be implemented You could have mentioned IFRS 9 as well that will be implemented in parallel, but it will take some time to to be Fully covering the the portfolios obviously if the eco-fine decides to go to Pillar one measure legislative measures once it is applicable and once it is Addressing all the portfolios where we'll adapt our own measures. So regarding our measures. They are the new Non-performing exposures, which is indeed a difference with the eco-fine which is targeting new loans But we think that Now is the moment to address non-performing exposures in particular because we are enjoying good economic conditions in the euro area and if we wait until There is a pillar one text first and then it is covering only new loans We have to keep in mind that the the fool rolling over of the existing long book can take a decade so we we have also to address in my view the the future NPS until we have measures that will be implemented on Fully rolled over the the whole portfolio. So there is a sequence and we are ready to adapt our own Guidance once there is Something else, but still there will stay room for a pillow to we have first of all the accounting provisions the powers of the supervisors start when the accounting provisions are not sufficient With IFRS 9 they are less likely to be insufficient because there will be covering also Expected losses on if there is a pillar one tool one day then We will have only a smaller remaining part to address for sure Maybe I'll just add briefly and so regardless of the addendum even leaving aside the addendum and its application to new NPLs I think in general we would expect banks of course to have policies practices procedures and so on for dealing with their provisioning and We would look at that through both the portfolio lens and a case-by-case Individual bank file lens for example if we're doing onsite inspections where we would look at samples of files and Certainly, I think in terms of our expectations We're saying that banks need to look at individual loans and see where they are against these expectations But of course we accept that there has to be a kind of practical way to implement that and this will be part of what We would discuss with a bank. I think that's particularly important where we'd be discussing for example If it wasn't going to apply the reasons why particular loans or particular portfolios of loans for example didn't require this type of treatment Thank you. Any other comments questions Okay, why don't we start here in this in the third row, please? Good afternoon. My name is saying go going from LBBW. I'm wondering in practical terms what When the vintage actually kicks in ie once you have a loan considered Defaulted it usually takes three months six months nine months, maybe 12 months until the whole process has been set up everything is being Done to so as to restructure a loan Now is that period of time already being considered? the relevant period of time by when you would have to to provision such a loan and Once it has been restructured. Is there any sort of cure period? You have to be aware of until you can put it back into the good bank or the the good book so to speak And the second question derived from the answer of the previous one Did I understand that correctly that kind of given the I ever as nine implementation being just in In a couple of weeks Would you consider that to be a double-wemmy kind of for the banks in terms of stage two loans being considered in terms of LLPs or provisioning Plus the the intended provisioning under under your addendum Well a lot of good questions in this one. I will start with certain elements and I will hand over to Sharon First of all, you are describing first process Which is very much Statutory auditors on accounting process and there is separation between accounting and prudential we are not Authorized the supervisors to interfere with the the work of the Accountants that tutorial leaders and also with accounting rules which can be quite different In Europe because certain banks are using IFRS, but certain banks as well are using their own national general accounting principles meaning we can have 20 different accounting system with their own vocabulary and their own operational steps, so Keeping that As it is we come after The accounting provisions the supervisory perspective comes after On indeed you are high the supervisory Perspective now We'll have to take into account that the account in rules at least for IFR the internal International accounting standards has changed we had IS 39 now we have IFRS 9 So it means that when it is Implemented and it will take some time because the phasing in is a pretty long As it has been Decided so when it is decided when we look at what we consider Unsufficient as provisions from a supervisory perspective so totally different It's likely after IFRS that It will be better covered by provisions the credit risk and we will interfere letter so that's the that's the sequence and for us we use as a Prudential single definition of non-performing exposures This is the definition that means produced that has been produced by IBA and it was a significant Step forward to have a single definition of non-performing exposures for the entire European market That what this is what permits to do consistently the the comprehensive assessment in 2014 so there are different ways of calling non-performing exposures But what is the good way is to use the IBA definition? Yep, so I start there actually with the EBA definition because I think it has been a very important piece of progress and Both the addendum and our earlier qualitative guidance All operates on the basis of the EBA definition both of NPE and also of cure So it's consistent with those definitions And I think the issue that you raise in terms of timing is actually quite important and goes maybe to some of the other questions and commentary that there has been about the guide the addendum So the first thing is what is set out in the addendum in terms of timing is that? The proposal is that it would apply to new non-performing exposures from the 1st of January 2018 So this is a distinction between what is non-performing now and what is going to be newly non-performing? So really the scope is newly non-performing from the 1st of January The question then is well, how does that get implemented operationally and exactly as you described the bank has to go through a process of looking at That loan and are they able to put a restructuring process in place? What is their own provisioning requirement for dealing with that loan when would they apply that provisioning? How would they report that in their accounts and so on and then over time if that continues to persist that that remains a non-performing exposure and it doesn't cure then what we're saying is our expectation is if that's Unsecured then in two years time. We would be wondering why is that not 100%? Provisioned and if it was secured in seven years time from the time it turns non-performing Why is it not yet provisioned at 100% and that would be what the dialogue is about So when we talk about time that's the timeline by which we're thinking about implementation now Of course, there's another question about when after the public consultation and I think madam Wee has commented to this public or publicly already we have to take in all of the comments We have to consider all of the feedback and then we have to finalize the guidance So when it's actually published is another question about timing but in terms of how it would work That's the way it would work and then in relation to cure Then provided the EBA definition of cure would be met and we explained this in the guidance Then the vintage count or the the count of the days of non-performing returns to zero But it must be in the context of meeting the EBA definition of cure Okay, next question the gentleman here in the fourth row. Yes in the middle. Thank you Gregory turnbull Schwartz I'm fixed income fund manager Billy Gifford And I had two questions one was just regarding the toolkit that the supervisor already has and whether it was felt that This aspect was missing or whether you could already have these conversations on a case-by-case basis in a nine non-binding manner And you know with with everything as it stands today Or whether it was felt that this was required in order to have that and the second part would just be in terms of the publicity or otherwise once You have identified an entity that's perhaps not living up to that standard Is it intended that there would be some sort of disclosure to the market of that or is it going to be? Kept on an off, you know on a private basis Thank you Thank you. I take the first one and you take the second Sharon well The the supervisors are not overstepping their mandate in these we have the obligation to address Venerabilities in the banking sector on to guarantee the consistent application of regulation on supervisory policies and that Includes providing guidance that ensures a fair and equal treatment of banks and in particular on an issue Which is as important as delicate as non-performing exposures on the commission in the recent report on the the SSM as explicitly and courageous to take care of the necessary adjustment in case Accounting provisioning is not sufficient from a supervisory perspective And it's important because there were certain institutions or people or banks that Considered that the language was not clear enough. So it has been very much clarified on we Considered that it is very good. So now nobody can doubt that we have the possibility to take What is called the pillow to measure specific bank per bank case by case measures It is the supervisors prerogative to impose requirement on a case-by-case basis depending on the risk profile of the bank And that is complementing Requirements set by lawmakers. So even after the adoption by legislators for example of a pillar one tool and it's very good that they take The step of having also a pillar one tool so the strong basis will be there when it is there And we can complement bank per bank for the prudential part that will obviously be less Important because part of it has already been done by IFRS nine on by the legislator for pillar one So I would just add on the kind of missing the idea of whether it was missing or not First to just echo what I said on my opening remarks that for us I think this is about being transparent and we do this for lots of other things I mean the ECB and many other supervisors publish often their expectations of all sorts of things the ECB has other Expectations around cyber risk for example and other risks and in doing the addendum that's and in fact our qualitative guidance earlier I think we are trying to be transparent about what we expect to see and that makes for a more informed supervisory dialogue because banks know already what to expect and of course the public and the market know as well So I think this is an important point Sharon I will say that we have already published 17 such documents which produce expectations from the supervisors But some of them were not so quantitative so where But somewhere quantitative like the expectations regarding dividend policies So it's not something new just that because of the issue with attracting more attention. Sorry for interrupting. No, exactly And then on the disclosure point and so clearly a supervisor We have lots of confidential information and we would not be proposing that we would disclose this But we had already in our qualitative guidance Some expectations set out there about further disclosures that banks should make and one of the disclosures That's listed there is that banks should disclose Vintage's and provisions by vintage's and so on and this is also referred to in the addendum, but the disclosure would happen in this way So the gentleman right here in the next row after behind yes, thank you I'm Federico Cornelli from the Italian Banking Association We Recognize the need to reduce MPS in all Europe and we welcome the introduction of your guidelines on MPL's management on March 27th 2017 and It is important for us the creation of a quasi liquid private market for MPL Which we would like to maintain stable as much as possible I have four questions if I may the first one regards the impact analysis The better regulation principles for sees the impact analysis should be at the base of any proposal for new ruling and Providing estimated impact on the proposed regulation per se over the specific industry and more generally over the economic general cycle and To this extent we wonder how the two years and the seven years timing have been computed We understand that it was based on the an an international benchmark also, we wondered if you have any Estimation of the consequences of such ruling on credit pricing credit supply GDP growth, etc. And in in our view if you have any Estimates on the impact on LGD calculation, and this would be Precious for us and second question is again the coordination between IFRS and tax and your prudential regulation This proposed prudential regulation Does not match with IFRS in Italy all banks use full IFRS and tax rules Banks could easily find themselves in a situation in which IFRS and MPL addendum rules produce different computation This creating problems for financial communication and potential impact on price sensitive information both for listed and Non-listed banks in particular We have in mind the prospective Prospectus directive the my regulation and again We wonder how this ruling could impact on minimum capital requirements on the branch of minimum Distributable dividends and on the new MRL requirements and As fast as taxation is concerned IFRS provisioning and prediction calendar provisioning do have different treatments This creating a tax distortion Is there any chance to avoid any problem and just to find the solution we are trying to to find the solution to this the first the third question is that As madam we said there are different experiences in civil course length in Europe But the it seems to us that the MPL addendum does not taken to account different traditions of judicial system And especially a different lens of civil course those imposing our one-sides fits all We are extremely in favor of a rapid rapid convergence path in civil course and back group see codes We every day we ask for a European set of common codes But until we reach such convergence We should prudently take into account that there still exist differences and The fourth question is We hope that this and new MPL addendum will apply to new loans Originating from the date of in the future also taking to account the value of the currency Guarantee is connected to MPs It is our opinion that the European Commission proposal could be a starting point for discussion Even to allow house to correctly price new loans Thanks for your attention Thank you for the questions. Hopefully I can pick up all the points. So maybe I go in reverse order first So in terms of the new loans, and I think you mentioned guarantees. We do have a way of considering guarantees, and I think madam newie has already commented about the Commission proposal and and so on and how both pillar one and pillar two measures may be needed and also the fact that if the Commission introduced their proposal it would clearly take some time and so on and this is obviously required Or potentially required now And in relation to your questions about the impact analysis and the the court systems I might take the two of those together because they do kind of interact a little bit So when we were considering the calibration of the two and the seven we looked at a number of different things so we looked at Similar requirements like supervisory expectations in other jurisdictions including outside of Europe we did look at Exactly the point you make about the length of time it takes in judicial systems for collateral to be Executed and so on and this part of our work was very much informed by our Stocktake of legal and judicial practices, which again we have already published in the interest of transparency. It was published earlier this year So I certainly think we would share some of the concerns you you mentioned there about these differences and how the length of time particularly to execute collateral can vary across Banking union and we have raised that publicly before But we took that into consideration when we were calibrating the seven years Particularly that in some countries that can take quite a length of time to get collateral And I think that we felt that seven years was a reasonable balance taking into account all that the different factors Of how long it might take to go through court But also to say that if after seven years you haven't managed to restructure alone You haven't written it off under your existing policies and you haven't managed to execute the collateral It's reasonable to ask the question. Well, why is this not fully provisioned? So that was a part of the analysis there in relation to the more macro effects I'm sure Daniela want to comment on that but I think we see That growth has improved in the eurozone over consistently over recent years And I think we've a strong view that NPLs can cause Tremendous problems in terms of the ability of banks to lend and finance the economy And so we have to take the opportunity of these times of growth to deal with the issue and we can't allow to persist So I think from a macroeconomic point of view at this informed our assessment of how it would work In relation to your comments around tax and disclosure and interaction with the prospectus and so on I certainly think this is a useful thing to have been raised in the consultation And if you have specific suggestions and so on about how those kinds of things can interact We would certainly look at those to make sure that they're clarified in the agenda Thank you very much Sharon. I will try to pick up the remaining points And if I miss one feel free to ask me to the question afterwards You mentioned complexity compare with IFRS 9 well first of all What has not changed is there is a block which is the work of the accountants or statutory auditors About accounting rules and what is potential and it has always been different The two blocks on top of that there is Long on complex I recognize phasing in of IFRS 9 which has been decided the ECB was in favor of having The initial shock to be phased in but not only this is phasing but the the additional provisions Are phasing in even where they cause by business decisions that have been made When IFRS 9 was already Applicable so it will take a lot of time before the effects full effects of IFRS 9 on The solvency of the banks for example will be taken into account so the risk of complexity is almost non-existing But in any case it is Not materializing even if a little before quite some time regarding the the credit delivered In Italy for example because you mentioned you are from this country and mentioned the point I had checked this morning before coming to this discussion on the hearing and results from ECB statistics regarding Italy third quarter of 2017 are quite clear they show an increase of credits for both households and firms on a parallel move towards more accommodative Lending standards by banks and households on firms towards households on firms so no such risk right now and precisely because the period Is the the guy the right one to do this and before the recovery in economic situation I was told by the Italian banks that I should wait until the growth was back and precisely growth has been back for For some time now and it's good to take the benefit of this good period of time You mentioned differences in taxes. Oh, yes, that's that's absolutely correct but it has always Exists and this is not something that can Stop supervisory work We have no power no say in taxes and that's very correct in my view should not be the case And we are looking at risk and we appreciate risk on what has to be done to cover to cover risk you mentioned also the The fact that the judicial systems are different on some are more efficient than others That's a pity because in the banking union that should not be the case It should it should move and in fact Sharon Sharon on a team I've spent a lot of time to produce Different 19 Stocktake of the the situation of the different countries best practices Judicial systems and so on and so forth Precisely to to make sure that the situation would improve on what National Government should do they should take measure to improve the efficiency of judicial systems on some are doing many are doing And this is work in progress also in Italy to the best of my knowledge They should increase access to collateral and they should create faster out-of-court solutions Regarding the creation of a liquid market of distress dep yet that should that should happen Should the the magnitude of the problem is such that we need all tools that we can get to be able to Adopt all kinds of solutions for these non-performing exposures on all initiative Are welcome obviously Improved data quality and access that's very important because the prices of the non-performing exposures if they are sold in liquid markets or European platform or whatever depends very much to the Quality of the data that can be provided on precisely the level of certainty of the recovery of the Collateral if there is uncertainty because of the judicial system that is preventing the the prices to to to go up And obviously they should remove tax on legal impediments to debt restructuring That exists in certain countries, but that we cannot do Non-performing exposures is a problem that goes beyond supervision and we need the help of all stakeholders Any further questions so the lady here in the front, please Jacqueline Mills from the Association for Financial Markets in Europe. I have three questions. I'll try and make them quick I think two are perhaps a little bit more Fundamental philosophical and one is a technical question The first question is about the nature of the supervisory dialogue And I think that our members welcome the fact that you have given clarity on your expectations here That's you know, it's quite clear. You say it's nothing new, but it is a quantitative Clarification and and that is helpful It's also very helpful that you've clarified that there is no automatic consequence And that there will be a supervisory dialogue And perhaps it would be useful to make sure that that is reflected in the final in the wording of the final guidance. I Wonder if you can so this is my question. I wonder if you can say anything Perhaps as to the the Supervisory Supervisory dialogue and its process I think that there might be a way to address at least the perceived burden of industry here And ensure that there is No confusion between accounting and prudential approaches So we understand that it's not your intention for there to be any but to ensure that there really is the clear separation Is there a reason why You would not Instead of using your expectation as the starting point and then asking a bank to explain and justify Why it might deviate? Is there a reason why you would not look at the accounting provisions and Ask for justifications when you think they are necessary because the situation does not meet your expectations So it's kind of difficult for me to explain but I'm talking about trying to change a little bit the onus and The burden of proof if you like that's not the right word But to put the onus on the the the supervisor on the ECB to challenge when the expectation is not met So that the the expectation really is a kind of backstop rather than a starting point to avoid the kind of confusion So that's that's one question if you could talk us a little bit through the supervisory dialogue steps And why the reversal might be possible or not? The second question is the elephant in the room you mentioned in your introductory remarks that this was not the point of the discussion today but definitely there is a lot of interest in understanding Whether there will be similar Measures or not with in relation to the stock as soon as information can be made available On the approach that would be adopted there. I think that would be very helpful and it would help communication and dialogue between Supervisors the industry and also all of the other stakeholders who are involved in Addressing this issue and then my third question, which is the technical one is Are you able to provide a little bit more clarity on the definition of exposure? When it comes to for example of balance sheet exposures and how those might be dealt with Thank you. Thank you very much. I will take the supervisory part and Let the more Technical and also the possibility to add to the supervisory part if I forget something because Sharon is Is on as a very strong background of supervision as well In fact, why to start with expectations and I will use concept that Sharon has already put on the table and that I had not Transparency when undertaking a job of supervisors. We supervise 125 banking groups comprised of 1200 banks in 19 countries We need to have a methodology to benchmark So many different banks. So we need to have expectations. We need to have a Discussion between supervisors on the decision at the supervisory board on what are the expectations? So that's why it is the starting point I would like to give examples on a couple of other issues that you have addressed You say why not start with the accounting provision on the have the prudential on top? In fact, this is the way it works and I will give you the example of the 2014 Comprehensive assessment. We had an asset quality review, which was a part that precisely produce Misvaluation of assets lack of provision sometimes of assets and then there was stress test Conducted on the basis of the corrected valuation. In fact, what happened after the the exercise? We had meetings with the statutory auditors of all the banks We said that way we're in the comprehensive assessment We said to these statutory auditors. This is what we consider as supervisor missing provisions What are you taken into account in the? Accounting provisions If you take 50% of that we will take 50% on prudential side If you take everything we will take nothing on prudential side. So There might be differences depending on the accounting rules, which are quite diverse as I already mentioned so if the the work is done by the The accountants accounting rules it's okay But when it's not done then we have to address the missing provision on the prudential side So this is the way it works still now We look at what has been done by the auditors and accountants on We compare that with our expectations on then bank per bank because this is what it is Prudential supervision on pillar two its bank per bank case by case regarding what is the supervisory dialogue exactly I will give you an example of supervisory dialogue by addressing the the stock precisely the the legacy assets we had Qualitative guideline that was defined by Sharon's group and we were working on the expectation for the steady state but during this period of time in parallel to the consultation on the qualitative guidance In parallel to the work on the steady state we had this kind of supervisory dialogue With the banks that are burdened by non-performing exposures It means that following the the completion on publication of the qualitative guidance last March We meet with the significant banks that wear burdened by this issue and ask them their own non-performing exposure Plans and over the period between March to June the banks submitted their plans their strategy to address The non-performing exposures and the joint supervisory team the GSTs Met Bilaterally with each of these banks on the issue and we are now in a process after one Meeting or two or three meetings between the GST on the bank. So you see it's really case by case We are in the process to send letters GSTs will send letters to the banks assessing their strategy Based on are they ambitious enough? Related obviously to the the quantity the magnitude of the effort how realistic they are on the governance So ambition again, it's easy cross-reduction volume The bank is targeting How realistic it is well, it depends is it feasible and it depends on the Measures that will be used to reduce non-performing exposures What are the tools cures cash recoveries writer sales? How do you see five those measures are? and Obviously, if you want to sell Do you have enough provisions not to take losses or do you have enough capital to take some losses on top of the Provision so this is what is realistic Then we look at governance If it is a big project for the bank if it is ambitious if it is an important issue for the bank Obviously, we expect the banks to have performance incentives possible bonus for example for their Staff that are based on the reduction of the NPLs. So are there really a good incentive and Also the quality of the plan That is a pretty general and vague and that will lend in two or three years and know my stones No, nothing major a ball at each might my stone is not exactly a good plan. So you you see the Supervisory dialogue is pretty intense and this is what we have done on the stock this one And we will do the same on the basis of the expectations for the future non-performing loans and this is already Providing quite quite good results. So that's why Also We are working on something for for the stock I don't know at all what this something will be because this is working progress and I have not seen Anything but obviously the idea is to have We have three categories of three categories of banks. There are banks that Decide okay, the supervisors are very serious about that It's the moment to do a serious turn around of the bank and to have a kind of one of cleaning Capital issuance you we have another category which take it seriously are a bit slower, but That will produce fruit as well And they are still banks nevertheless that are in denial or send a vague plan Lending in two or three years, but without explaining how it will be delivered and that do not have the capacity of disambition because Not enough Provisions or so on and so forth. So we certainly want to push forward in this solution for the stock the ones that are still in Denial or we don't want to create Problems to the ones that are doing the right thing at At a good speed Thanks, Daniel. Maybe I just add a few points and so first of all you talked about language and the redrafting and so on So I would say again In being transparent about our expectations It's very important that people understand what they are and if there have been misunderstandings then obviously we have to address that So that is exactly why we've had the consultation process and that is exactly why we'll have the hearing Maybe to give you an example of that. We have been clear in the addendum if you have it there with you That this is non-binding. We also have a kind of diagram or figure Table in the addendum which says that there will be no supervisory measures If the dialogue delivers that the deviations are acceptable and there will be if the dialogue delivers that the deviations are not Acceptable so for me, it's clear that it's not automatic Having said that I think words like comply and explain and so on have been interpreted as being automatic So I hope we've been clear today that that is not the case And we will certainly take that into account in the drafting a further point on the dialogue, which I think Madame Newey has explained really really well Including the examples she's given I think it's sometimes thought that the dialogue begins one day and it ends another day And that's it in fact. It's constant. It is going on all the time So you talk about the burden of proof. I talk about challenging back-of-bank the bank says something I question that and vice versa So it is Genuinely an iterative process that continues a lot and I think the strategies for NPLs is a really really good example of that Clearly we started with the comprehensive assessment We didn't kind of not do anything else on NPLs in the meantime until we publish the qualitative guidance This was ongoing dialogue all the time and the work on the strategies is definitely very focused on that at the last thing I would say about the stock is Clearly there is work is ongoing and again. We have been transparent about that I think though we have always tried to take into account the current situation So we have gone step-by-step through the comprehensive assessment through the qualitative guidance through this addendum and quantitative guidance We take into account what's going on in the wider economic environment We take into account the situations of the individual banks We take into account the progress that's being made or the progress that's not being made and all of these different aspects will inform Whatever that that further proposal is that we will make in the springtime on the off-balance sheet Exposers I think Anne was going to say a word or two and then maybe Danielle wants to go back Exposers are generally included because we use the EBA definition of NPE and if you look into that definition It does include off-balance sheet now 95% of NPEs are actually on balance sheet if you look into our latest supervisory statistics So the off-balance sheet item on average is not a big deal However, the coverage is relatively low again in our statistics you see it's only 14% So it can indeed be a relevant item for a couple of banks If you have ideas or certain things that you think we need to clarify in the addendum Please let us know otherwise. I would see it as part of the supervisory dialogue to address these these very specific topics No further. Okay, then we will continue the gentleman in the far on the far right there, please Yeah, thank you. My name is Ingmar Wulfert from the Association of German Banks. I have one question concerning the scope of the addendum and to my understanding you mentioned in your guideline published in March that this guideline or several parts are primarily addressed to high NPL banks, so We would suggest that the addendum is also addressed primarily to high NPL banks because we think With this addendum low NPL banks, they also have to implement the processes etc and These banks would maybe be punished in inverted commas by implementing this addendum so that would be our Proposal to make it clear Maybe we were not clear enough, but obviously our expectations are covering All banks that we we supervise we want to implement level playing field on consistency obviously it is of interest for the banks that are above certain thresholds above the the average for example of the ECB but SSM ECB SSM banks, but precisely certain countries Are not necessarily very well equipped in their legal framework because NPLs have not been an issue for them Recently and is not now, but this is the moment to change the judicial system for the moment where they might be Concerned on burden by NPL seat may happen. No country can consider that it cannot happen to them And we have also another concept that was defined in our work regarding Non-performing exposures They are banks that are overburdened by the global their percentage of non-performing exposures compared to the other loans and assets, but we Use the concept of pockets of non-performing exposures. They can be there can be banks that have Small ratio of non-performing exposures, but still have Can be shipping can be real estate Can have one problem that they have to fix it's less big problem because it's a pocket of non-performing exposures in In portfolios of credit risk that are of good quality for the rest, but still it doesn't mean that they should not address it so Obviously the supervisory dialogue is very intense with the banks that are currently burdened But we want the other banks to be properly equipped. We don't want to have a long phasing in for new Bank that would enter into non-performing exposures. Everybody has to be ready Any other questions? So let's take the gentleman and the lady there and then we will move over here You're sharper Deutsche Bank and thanks for taking my two questions. Actually, one would be a follow-up questions regarding the supervisory dialogue being Can you a little bit liberate on how you ensure within the supervisory dialogue the consistency in the explain process? ie If in one discussion turns out a certain portfolio or a certain approach will be Accepted as explained how this is ensured doesn't another firm the same assessment will be done And the second question is also a technical one and maybe I've over read it somewhere, but in order to also Encourage the the sales of non-performing loans amongst other banks How are purchased? Credit-impaired assets being treated under this Rule So those are defaulted according to the definitions those have to be considered Is that something which we then have to take up in the explain process or is that something which can be per se? excluded Are there any ideas which you already have? Thanks Thank you. I will start with the supervisory dialogue How we obtain the consistency first of all precisely by having expectations known and they are known publicly for for this so it's a transparency Helped also because the outcome of this supervisory dialogue is an input into Into the what we call the threat process supervisory on review process that on the annual basis delivers the the pillow to Capital on other measures other requirements on guidance And also by the fact that those decisions the final Outcome of these supervisory dialogue comes for decisions to the supervisory board of the SSM on all members are quite cautiously and prudent and Attached to the the consistency precisely it's not unusual when we have a new development a new point which is address or something that has been addressed but not so often for everybody to remember that I Am asked by my colleagues prove me that you and I won't maybe this minute in the summary of the this meeting Prove me that you are ready to take the same measure When there is a bank that will be in the same situation Obviously has to be the same situation because pillow to unsupervised reaction is bank per bank Or prove me that you have already taken this measure for a similar bank before In the in the same situation. So this is something which is Taken very very seriously permit by members and also of course by us because this is what What we want to do to be fair in banking supervision and to be fair you have to treat banks With consistency on fairness and it's important because if you are not fair You cannot be tough and we need to be tough because we there is no room for complacency. We are coming from very Serious crisis we have been billed after a very serious crisis To to make sure that we are better equipped when there will be another crisis. So Consistency level playing field is taken very very seriously Explanation well this take play takes place in the dialogue between the the banks and Their GSTs. This is the way it it starts the visits Of the banks voluntarily to Frankfurt or maybe the GST is asking the banks to come with a certain periodicity on certain Agendas in general is both voluntarily plus the the program of supervisory action for the for the year and What I always tell to to the banks that I meet in particular when I go Visiting the 19 countries of the SSM is that if you are not fully satisfied by the Explanations you have received from your GST escalate the questions to the DG pay a visit to the DG In charge of these GST and if you are still not Comfortable with the response or fully convinced by the response that Have not fully understood the response. So you can come and see me. I will I have never refused the meeting with the bank and In general, I would say the banks understand what I have in mind and what I am expecting them to do Sometimes they will not like it, but they will get a clear response It's I would just add to that that I suppose Internally within the the JSTs and the support structures that we have to support the JSTs and doing their work Kind of behind the the published guidance and the expectations is a lot of material about benchmarking comparisons across portfolios across banks across countries there is You know processes where JSTs can get support from each other and other colleagues internally to compare and understand Explanations and to make sure that that this kind of consistency and fairness is put in place And that goes on as part of normal supervision again complementing the supervisory dialogue In terms of sales and I might say a further word in a moment But I mean the intention is that there isn't some way for you to kind of arbitrage the system by selling a Portfolio from bank to another and if a new bank buys a portfolio of assets Then of course the same expectations would apply but in the same way I think you even mentioned that this would also be part of the dialogue But maybe you want to add something yeah generally fully fully in line with your comments And I guess if you have the financial means and operational capabilities to buy NPL portfolios You will have done a sound due diligence and this is a very sound evidence for the supervisory dialogue And if you can prove that the cash flows you had expected in the due diligence process are coming through I think you really have a strong a strong case for for next exception Okay The lady next to the gentleman who just asked a question I had a question to my name is Sandra Huck also Deutsche Bank And I have two questions the overall idea of the NPL guideline I understood that you want to manage non-performing loans better but if banks Need to provision their exposures non-performing exposures by hundred percent In a very short period of time two years even though clients might still recover Don't you see a risk for the real economy that banks might Be more reluctant to lend in the first place to less profitable clients to sub-investment grade clients And then also when clients have become more the loans turned non-performing The question is what would happen to those loans? We assume that there will be higher rate of non-performing loan trading So if a bank for example has as a commercial lending team Loans in their books then do they then need to sell those loans to their trading desk to prove that There is still a value in it because then the market has proven that there is a value in that loan And then they don't need to provision and then we only have all those loans with the trading entities And not the commercial banks anymore who are supposed to support the economy private households and corporates Well, I Don't think it goes it's needed to go that far we have wonderful situation being the supervisors of 19 countries to have a good knowledge on the good benchmark of the situation on Good appreciations and I'm sure my colleagues will demonstrate because their their databases is incredible Incredibly comprehensive and precise so no need to go to the market to have a price that could be negotiated with another counterparty as a matter of fact that would not be enough to have Such a limited number of transactions we have better better information You you your questions seems to suggest as well that to take care of non-performing exposures Is eating financial stability at the end of the day because less loads on the less gross maybe We What is we cannot ignore risk? If risk are not addressed they are not Disappearing they are just getting bigger. So we need to address risk We need to address risk early enough when the piling up of non-performing exposures Is taking place That will learn probably That will demonstrate to the banks that maybe There is something wrong with their underwriting credit criteria if they are starting to pile up Necessary provisions for non-performing exposures And it's better that they know it sooner than than letter to be able to Correct the trajectory And as the president I said I will remind you that banks that are burdened because precisely they do not address the non-performing exposures at the beginning burden with non-performing exposure stocks are the ones that constantly and consistently lend less to the economy so I guess there is no other solution than to have a good knowledge of the situation thanks to the supervisory dialogue underneath to make the provisions when the new non-performing exposures are starting to take the needed measures to correct the strand on address the the problem of the stock when there is a stock Fast enough to be able to do their job on really lend to the economy not Spending their human resources to Get solutions for non-performing exposures instead of on changing their business model when it is needed or finalizing Fine tuning their business model rather than put all their energy to address a big stock but you have Can mention what you have in your databases maybe to To avoid the need to practically get a price So we have obviously regulatory reporting But we also have been implemented a series of enhanced reporting for banks with higher levels of MPL's We also engage quite regularly with banks on management data We engage with accountants also and statutory auditors on the level of transactions We would monitor this on a quarterly basis. So if we were to see Movements and that maybe warranted us to focus on with the higher level of risk and higher level of attention This would absolutely be in our remit This would be something the JSTs would deal with on a quarterly basis really assessing the data the level of granularity And mismatching mismatches etc. So this is definitely within our focus and something again That we will continue to monitor when the guidance is implemented so that we can ensure No arbitrage for example or unintended consequences, etc. So absolutely in our radar Thank you. I think there were some questions over here on the side of the room. Yeah, so the gentleman here or the You start with and then can you yes, please hand over then the microphone to the gentleman. Thank you. Thank you very patient Thank you very much Francesca Brunari from Confindustria Confindustria is the Italian Association Representing one hundred fifty thousand manufacturing and service companies employing around five point four million people So just a few comments on businesses side Businesses are concerned about the impact on the of the addendum on credit supply to enterprises and particularly to SMEs Which still rely heavily on bank lending in this context We are still particularly worried about the impact of the addendum on unsecured loans, which of course are very important to us Of course, we acknowledge the importance to keep reducing MPL ratio and The stock of MPL. This is particular Important for Italian enterprises, but we believe that this has to be done gradually We share these concerns with business Europe, which is the European Association Representing association of industrial companies from all over Europe business euros and a letter to Madame Nui early this week Answering the consultation Together with business Europe we fear that the release of the addendum at the beginning of the recovery phase Which is very important to us could represent a restrictive measure penalizing economic growth across Europe We do not agree with the argument that the addendum would impact only on specific countries or specific banks On the contrary, we believe that due to an unavoidable contagion effect in the EU Measures like at the addendum could penalize the European banking sector as a wall and the European economy as a wall Increasing systemic risk and not reducing systemic risk This is why we believe that before finalizing new rules It is essential to carry out an impact assessment of these rules On enterprises in order to ensure that they encourage growth and prevent damage to businesses in the wider economy That thank you very much for your attention Thank you because you represent the corporates I would like to make a remark on the for the corporates as well on then land and over to my colleagues In fact when non-performing exposures are addressed early enough It's much more likely that there will be able those exposures those loans to be queued to be restructured on transform into a performing loan And that's important for the corporates because if this is not happening What is a non-performing loan in the balance sheet of the bank is something that is also in the balance sheet of the corporates and Until this is a fix with the the other lender way or another The good banks the banks that are not burdened by non-performing exposures on that are Making more loans that the others they will not make loans to corporate which has a long Number of elements in the balance sheet that are just disputes with the banks loans that are not Performing while borrow borrowing for for the corporates that are not performing. So we should not think only about sales or right of for Also, the right of food help the corporates But when it's done early enough really the way of addressing it is much more easy and much less painful to restructure the loan make it performing by having longer maturity maybe by Structuring it differently And it's not a benefit for the the corporates to have these non-performing loans Not at rest. It's even a double punishment. In fact for the the growth on the economy of the country I would only compliment that I think the point about addressing earlier being better and is absolutely the case Unfortunately many countries and many of our supervisors have had bad experiences over the last Few years with non-performing loans and the negative effect that they can have our qualitative guidance For the stock when we we prepared that a lot of the work There was looking at best practices in banks and in other supervisors prior to the introduction of banking Union And certainly one of the key issues there was that addressing problems earlier and putting in place proper restructures So not what we used to call extend and pretend but proper restructures that are actually effective and is better And so I would just add that to what has already been said. I think the other aspect is And of course in introducing something for new loans We have to think about how that will interact with credit But I think it's our responsibility to make sure that non-performing loans do not emerge as another problem into the future And that is a key motivation in this case is to protect Banks and economies and households and firms From a build-up in the future because we can see now the scale of the problem that we have with the pile of Non-performing loans that we still have from the previous crisis So the gentleman who has the microphone, please Yes, thank you very much. I am Ines Bicula from Italian Federation of corporate banks So I have three questions to put on the table the first one Don't you think that an excellent and general obligation for provisioning set at 100% Denies the risk-taking and risk management core nature of the banking business This is the first question the second one I would like to to come back to the microeconomic effect There is no doubt that Growing economy as we have at the moment is a good environment for balance sheet cleaning and to reduce significantly the stock of NPLs However, what will happen during a downtown cycle? How to overcome the likely Procyclicality effect in an economic recession Did the ECB carry out an impact assessment? If so, what are the results? The third question What do you think about implicit incentives given to market participants for non-performing loans? In my opinion those incentives are not the right one Because as non-performing loans buyers know that Banks are obliged to sell their non-performing Loans portfolio within a binding deadline Buyers know that they have the upper hand on price setting. Thank you Well, I will start on in particular with your last questions Incentives I don't know but I think an important incentive that is for banks that doing too little too late Can take them to fail Or can take the SSM to take a decision of failing likely to fail these has happened recently to a few banks On that's triggered by investors that are losing trust in in the banks on Stop funding them at a certain moment because they considered too little too late is done. So it's a Very serious issues that banks have to take seriously That's The first point Regarding the Well, I have not noted very well your your first question So I will hand over immediately and I will come back if something there was something I wanted to say I also start with this question about incentives First to say there is no Obligation arising from either the original guidance or for the addendum for banks to sell portfolios of non-performing loans I think we have been consistently clear in relation to this in all the communications We have made about both the original guidance and this addendum clearly Sales of non-performing loans is a tool that banks can use as part of their suite of measures But we have not imposed any requirements on banks to do that and as part of the strategies and the dialogue That continues with the banks of course some banks may decide to do that But we haven't set any expectations in that regard. So I think you said I think it obliged It's important to clarify that because we haven't put an obligation like that in place in terms of your broader questions again about the economy and so on and The backdrop of a growing economy being a good opportunity to clean balance sheets and a concern about prosyclicality And I think of course we have to take all of these things into account But I think our view is if you don't deal with these issues in a time of growth Then what happens if there is a downturn in the future and there is still a significant problem or a growing problem at that time and so for us it's a balance of What is the right and prudent measure to do particularly in this case where we're talking about new loans to prevent a build-up of? non-performing loans into the future and then if I understood your first question well about the hundred percent Effectively putting a kind of obligation on the bank that denies its ability to do what it's there to do Which is to take risk and make loans and I think and I certainly hope we've been very clear today That this is not a kind of a binding approach We are setting it out in a clear way that this is what we expect I think it's reasonable as a supervisor to say if this hasn't been dealt with after two years or seven years What is going on here? Why has this not been dealt with why has it not been provisioned? And we are setting that out as a starting point in terms of our expectations for the dialogue to take place I think it doesn't mean that there's a general obligation on a bank to do something That means it can't take on loans and do its work in terms of managing risk and so on yes I have found the two points that I wanted to add it was mentioned several times of we have not reacted Why not impact assessment? Well, we are talking about new non-performing exposures So it's a bit complicated to have an assessment of something that does not exist we can use different elements to try to Guess what the situation will be but we can do an easily an impact assessment for everything Related to the stock, but it's pretty difficult and we believe that due to this new framework that ensures that credit risk is taken more seriously credit under writing criteria Will be reviewed or improved in the bank there will they should be less new non-performing exposures after the guidance and after all the work on the supervisory dialogue which is taking Place right now for for the banks that have to to address their problem Regarding also the the the automatic element and there was Directly or indirectly a relation to the fact that we disregard the value of the collateral for example for the The secured loans We don't question at all the value of the collateral, but we question the timely executability of the collateral the Recoverability of the collateral because if it cannot be Repossess on use on execute in such a fashion that it is Covering the the non-performing exposure. What is the benefit of having such collateral? On after such a period of time the probability that something will be recovered from the collateral is much much lower So well, yes collateral is a credit risk mitigant, but once a loan becomes non-performing Seven years to take care of the executability of the collateral is something already Quite I would say maybe not generous but reasonable at least Thank you another question or comment from the front here, please Thank you very much. Jacqueline Mills from the Association for Financial Markets of in Europe again I Think to quick observations and then a question if I may It seems that in the debate on NPLs and how to deal with them one Aspect that perhaps requires further Attention research Consideration is precisely the role that collateral does play. I think it's not always about Its execution It doesn't necessarily have to be executed or realized to help restructuring and successful outcomes and I think that that also might be at the root of some Some of the industry's nervous nervousness about some of these proposals Second comment It was an association representing financial markets I think what I we would like to say in terms of the development of secondary markets for NPLs Of course, that is very important as being one of the solutions That has been mentioned. I Think and we would encourage the ECB But also all of the other institutions who are involved in these discussions to ensure that there are no Distortions that are created as an unintended side effect in the market So making sure that there is an appropriate balance between the supply and the demand signed is very important And I'm not quite sure but I I hope that Sharon Finn's team would be looking at possible Unintended consequences or possible distortions that could arise in that context my my question Relates again a little bit to secondary markets and NPL purchases and trading I Was a little bit concerned about the response to an earlier question on how to deal with the Purchases of NPLs and whether the calendar provisioning expectation would apply in that case It it occurs to me that perhaps a purchase of NPLs shouldn't perhaps not be considered as Falling under the new NPL or new NPE category I Think it might be interesting to explore that Because while you do explain that there could be a case here to deviate from the supervisory Expectation depending on on the dialogue that you would have with your supervisor It seems to me that that could be a relatively burden burdensome process for some banks to have to go through to achieve that explanation And acceptance from their JST Whereas other market participants who are not subject to these provisioning rules would not have that burden And I wonder if they might not be again a little bit of a Again, perhaps an unintended distortion In the secondary markets here. Thank you Well this question was Responded by my right side, so I will let them two remarks on dot on your two First points that I'll kind of follow up to what I said before the the role of collateral and what we expect from collateral Well, that could be improved in fact and Will make the Recoverability of collateral More easy When we will look at what the bank sometimes call secured loans The In good faith believe that they have secured loans, but Sometimes they have in fact Promised to give collateral that was given when the the loan was Allocated what was granted but the Maintenance of these situations the legal documentation that could have been taken at a certain moment was absolutely was not perfect And well what is supposed to be secured or for us all of a second is not secured in fact because the legal documentation is not properly done or maintained And on top of that when it's possible when the legal documentation is correct indeed There are still too many Uncertainties regarding the capacity of the judicial systems to permit this this repossession Also regarding the secondary markets for NPLs. You said Something around the balance between supply and demand that has to be taken into account Well, we have Eight hundred billion of non-performing exposures in the SSM bank It's not a market for the buy for the sellers It will always be a market for the buyer until We are much much much much lower in the amounts so in these circumstances I Will say better be among the first to use the the markets because after a certain moment. Well, maybe There will be a no no buyer anymore. We don't know but it cannot the cannot be a balance when you have so much to to to sell Really Maybe just on the burdensome process. So first of all, I mean we're here to hear the feedback So thank you for that and we will certainly take it into account. Maybe just one observation Even if you leave aside the addendum Okay, and if you're a bank and you're buying a portfolio of non-performing loans I think it's fair to say your supervisor is going to want to know a lot about that Anyway in terms of understanding why you're doing that how you're going to manage that what the recovery is going to be like on that And so on so I think the point we were making was as part of the due diligence process A bank would be doing anyway to buy a portfolio of non-performing loans There would be a discussion with the supervisor to understand and then part of that now With the addendum would also be to take that into account But I think you can expect that there would be some discussions and information to be provided anyway But nonetheless, we will take away your comments. I don't know if you want to add something Sharon Yeah, so absolutely because as part of the process to buy them there is almost a right sizing of the value also So we'd have to take that into consideration So the value is coming down coming off the balance sheet of the the bank that's selling is going on to the balance sheet of the bank That's buying but as part of that transaction and as Sharon pointed out the due diligence process There is a in-depth loan-by-loan file assessment of the inherent value the valuation of collateral So there will be a right sizing there will be a certain Fixing the problem should you say in terms of you know, the estimated recoveries, etc So absolutely taken on board and more and more JSTs are engaging with banks on these particular types of Transactions and as we move through the work on the strategies, we are receiving numerous different types of proposals Similar to these where we are looking at them in a horizontal fashion to make sure there is consistency And that the data supports the assumptions etc. So very much part of the process Thank you. There's another question over there, please Thank you Charles from power asset management. I have a question Could you consider a general LGD waiver on NPL sales for a specific period of time in order to incentivize banks to accelerate the sale of NPL I'm not quite sure what you call LGD waiver. You mean that we disregard the very low price In the LGD that will be used for the models Well, we we are obliged to To implement The legislative text what the legislators wanted CRD for CRR And as a matter of fact being the Former secretary general of the Basel committee at the moment when we drafted this regulation about models I know what we had in mind on what I drafted also in in Basel and I am supported with my colleagues Stefan Walter also former secretary general of the Basel committee that knows what we have in mind In fact, you are correct. There is a small margin for specific situations That permit to be a little bit flexible on the consequences of very low prices That could damage the LGD, but there are conditions for that Normally, it has to be done for the sale of a comprehensive portfolio, the total portfolio Meaning that the portfolio that would have deserved this damaging LGD is gone totally So no reason to To have some kind of tainting of the other LGDs If it's not the case not totally gone We have to have a supervisory dialogue here as well with the bank explaining why All thought Apparently it's not the total portfolio which has been sold. What is remaining is not The same does not present the same characteristics as the the portfolio that has been sold with low prices and it can be the case. For example, we have situations where banks have Different vintages and different origins of the the the support for use Bank that has that is the the result of mergers that took place before If the bank can demonstrate that oh, this is coming from the former bank a on this bank It was much worse than the two others with whom we switched it was much Then you you have a good case dear supervisor to take into account Difference, so there is a possibility The the margin is narrow pretty narrow so We would not take the risk of not Implementing properly the legislation for I would say a small operation If a bank comes with good reasoning for These LGD issue and on top of that is ready to do Very serious one of cleaning That then the bank gets the attention of the supervisor This is what I can tell you on this Any other comments questions Over here, please Thomas Demiore from BNP Paribas I'd like to come back to one of your previous comments. You were saying that risks have to be addressed early so that they They disappear However, by by incentivizing banks not to be the weakest ones to sell their NPLs to less regulated not to say unregulated investors mainly non new entities until pushing and pay risks out of your supervisory scope only And therefore expose SMEs and households to much more aggressive collateral recoveries Banks build long-term relationship with their clients when third parties will be probably more interested in short-term profits Well, I will start by saying that as this is about a new non performing loans that's not Totally the the situation that you describe The situation that you describe is more related to the existing stock for which we can see Sales but we We take for the legacy Precisely precisely the stock we take the banks own plans On which challenge them to make them credible and on ambitious enough, but we start with the banks own plans and we we have seen So we recommend nothing the the banks is deciding about the the solutions supervisors should not manage the bank or manage their their problems Just make sure that the banks address the the the problems In us in certain countries where the the levels of non performing exposures are pretty high We can see What we call in our jargon strategic default us meaning a number of customers that could pay but Do not reimburse their credit because That's the average situation in the country. You don't reimburse the credit until you are totally forced to do that And hopefully will not happen any time soon So yes, they are probably the first Customers to target, but that's the job of the banks to identify on in general. They know them very well What are these strategic defaulters that we would like to see address? Among the among the first I would just add again I don't think we have made any obligation on banks to sell portfolios We recognize that this is one of the tools that they use And while not within our competence I know that in some of the countries because we saw this in our stock take of national practices and so on Some countries have put in place Frameworks to protect the borrowers particularly if they're personal borrowers if their loans are sold on Yes here in this gentleman here in the middle Thank you Federico Cornelli, Italian Banking Association Just to to understand you gave an answer Regarding the massive disposal of MPL's Imagine we are in the process of having the proposal from the parliament for the new CRR And we are hoped that the article 181 of CRR might have a Change allowing for The correct computation of LGD's in case of massive disposal I mean would you be in favor of such an Opportunity of course under the control of the SSM Or the national competent authorities because this will allow us to Accelerate the disposal of of MPL's avoiding the second impact of the Disposals and the first and the second question is When we sell MPL we normally have in front of us two kind of buyers. The first one is a non-bank for example a fund And the second one is a bank under CRR and all the other rule having a banking license if The question is would you apply the addendum to the bank to the potential buyer Again, even if this for example has a vintage or radio 5 Because this is very important to avoid again an unintended distortion of the Number of potential buyers as we have been able in Italy to attract A vast number of buyers and prices have soared from average 18 to average 32 It is of common common interest to maintain The largest number possible this could be two solutions Thanks I will start with the lgd issue with my Past experience long past experience with models. No, I don't agree with what you are proposing and you call it correct computation of LGD is when massive sale it's not correct computation of lgd. This is the real lgd when you sell Non-performing loans you are realizing your real true lgd. It's as simple as that so No, I am not in favor of that If we do that, we kill the credibility of models of european banks vis-à-vis the Other colleagues in other regions of the world. They are already expressed doubts about The the risk-weighted asset variability of models in certain occasions. We are spending a lot of resources to revalidate the models of the ssm banks to make sure they are Well Build these models well maintain on that deliver adequate risk-weighted assets so we will certainly not play games with lgd's that's not at all Possibility we want the the parameters of the models to be to be so sound safe and We cannot ignore risk by having a reality which looks nicer than what it is And it's also a matter of level playing field a number of Banks in the ssm countries are Selling unexpected Well, non-performing exposures and take the lgd consequences and have been taking the lgd consequences for decades so that will be Really a very Bad move in my view for the credibility of the the models that we are Creating by your or twin project this being said as I mentioned earlier For very specific circumstances There is a little bit of margin margin is seen Which is left to the appreciation of the supervisors And frankly with all the work on efforts we have put in trying to Address and fix these non-performing exposure issue again a banker which is willing to do the right thing taking the right measures And can give us good reasons to To use the possible flexibility on lgd Get we'll get our attention We will not start by being negative on saying no except if we will say okay Let's look at what you have to offer And we know also that when we do that we create a precedent because Another bank exactly in the same situation will need to have the the same treatment So we will be cautious, but open-minded provided. We are still complying with the rules which are the rules On supervisors are there to get the rules implemented, but indeed there is a small major small margin seen margin for flexibility, but again we Want to see you use the word massive. Yes massive operation of cleaning Would get our attention I think your second question was complimentary to the question or the discussion we were having earlier also So first I would say in terms of definition as we had said earlier the definitions are consistent with the eba definition So to set the vintage count back to zero or to say that alone has been cured and so on Obviously requires it to meet the criteria that have been set out in the definition and all of our guidance and so on is consistent with that important work that has been done to standardize And I think as we said earlier if a bank is selling a portfolio to another bank Then clearly there's a process that that's gone through regardless of the addendum in terms of supervisory dialogue And also the due diligence process and so on which would be part of the discussion And but we will I think consider the feedback in terms of how maybe we can explain this a little better in the in the addendum Yes a gentleman in the back here, please Hi, this is this is Manuel from Santander I I wanted to know if you could elaborate a little more on the linear path to this 100 that you are mentioning precisely because of the models And and to to know your opinion in this linear path could not geopodize the credibility of the models We've been working in models reacting to the vintage of MPLs for a while So I wanted to know your opinion on that Thank you So first of all about the linear path. I think the reason why we put it there Was to try to mitigate against a kind of cliff edge effect where nothing would happen And then at the last moment there would be a large provision to be taken. So we were trying to set out That that we expected banks to be able to do this gradually and this would be a way that we would think about it And I think it's important to emphasize as well though that if the bank Is taking more provisions than that itself through its own policies and procedures Then obviously that's also the case as well and we would be discussing that with the bank And I think then then in terms of lgd It would be about the the dialogue with the bank and how those things actually work out whether they have their own policies Whether they're taking a linear path or whether they're doing something else. Maybe you want to add something No, I I think the point is right that when we put in a suitable gradual path We wanted to keep it quite open, but for the two years make sense I think there it's good to keep it open and to give banks the time to to Consider themselves what's what's adequate. But when we came to the seven years We had a lot of discussion with our different supervisors in the 19 countries and there were concerns if we left it completely open And said just suitable gradual path It could result in an unlevel playing field. So this is why in the end we decided to put some High-level guidance now if there are ideas in the consultation phase where you say we actually have a better idea of how to specify this Which we consider a bit a bit better approach. We'd be very happy to listen Any Other questions or comments? Yes, please in the back there. Yes. Hello. My name is Nicholas comfort I'm a journalist with Bloomberg news. I realize it's not a press conference But since we're at the end of the hearing I would like to ask one question, please my question is about the a potential delay to the implementation of Of the guidelines, but I'm new. You were very clear very clear in Brussels at the corner hearing That you will take on you'll listen to all the feedback You will process it And if that means you can't get something together for the first or if it means you can't finalize your your package for the first of January, you will take more time to To finalize it Mike so my question is is how much time do you think you have? Is this something that needs to be done in in 2018? I mean 2018 is a long period and then even if you can't tell us Exactly the kind of the timeline on that Maybe you can tell us about the the the periods of time that matter for this because I I said on the outside I I look at bank releases and quarterly reports and they are quarterly And I wonder how how that Figures into to to any any potential delay and whether we should be expecting something It should be a month by month delay or a um a quarterly delay. Thank you Well to be honest, I cannot be more precise that I have been in the european parliament because we don't know yet How many comments on how complex the comments will be as a matter of fact? It was just common sense. So we did it before the this year ring we Ask our colleagues how many comments we have already received and what are the the points that we should be ready to address In this year ring because those are points of concern On the single end was enough to count the comments that we have already received So I presume that we will receive a lot because this is an issue that raises raises a lot of interest But I don't know how many I don't know how complex there will be We have received already it's not comments, but Uh a number of legal consultations The parliament in particular We will certainly take Into account all the good legal advice that we have received to make sure that The addendum is drafted as cautiously as possible and translates the reality and not Does not look like a pillow one For the rest we don't know so what we will do is that once the deadline is Happens it's 8 december if I remember well We will see where we are and we know that it may take two or three more days to see The the the total because a few will come also maybe the day after Uh and then we will assess the the the quantity of work it takes to do what we always do through consultation We take consultations very very seriously We we publish the comments we explain why we are taking comments certain comments and not others So based on the the time it takes to do a good job in drafting the final addendum on Explaining well going through the comments take the the the ones that we should take and explain why we are not taking taking certain of them We will see what it means Because if we look from a different perspective, what is desirable? The desirable is very obvious the sooner the better obviously to make sure that Uh We address the the the the future possible piling up of non-performing exposures But it will take what it will take. It's a it's a big issue We started in 2014 So a couple of additional months would not be an issue and I was indeed clear in in broscelles because I explained to The people that were in the ring the members of the parliament that were in the rings that I was taken note of what they were telling to me but That would be the final Decision the the supervisory board of the SSM that will take it But I said for for this one the timing precisely I will recommend I went as far as saying I will recommend to my Supervisory board members to to postpone a little bit to make sure if need be to make sure that we can make full use of the comments because indeed well The timeline is is very tight and probably too tight to even in spending a lot of time in the offices between christmas and new year's eve that would be a little bit delicate So a few additional months are probably needed But I cannot tell more because I don't know at all what we should expect Okay, thank you very much. We've just been very close to running out of time So let me close here. Thank you very much for coming. Thank you very much for your comments As we said the site the website is still open for comments until december 8 midnight. Thank you very much


Hi there 13.2 is all about volume of pyramids and cones Take out your notes slide this into your table of contents and get ready for some high-quality note-taking experiences So first recall the volume of a prism was the area of one base times the height of the prism Likewise the volume of a cylinder. This is just review is pi r squared times height Well for pyramids and cones The volume is just one-third of their sort of related prisms and cylinders So a pyramid is One-third times the area of one base times the height of the pyramid Now remember height of the pyramid is that distance from the apex or the tippy top to the base and Likewise the volume of a cone one-third pi r squared times height So for example if we were to find the volume of this square pyramid We're using the volume is one-third base times height formula We know since we've got a square base that that B is 36 square units and Then the height well to find the height, which is the purple segment a g We're going to use the triangle made up of points a g and e Segment g e is the app of them And so with the square if you double up the apathome you have one full side length So half of a side length is three and so the apathome g e is three units long We're given a e the green length is five units and so the apathome Can be found using sorry not the apathome, but the height can be found using the Pythagorean theorem So now we have all we need to know Volume is one-third times 36 times 4 which is 48 cubic units of fun How about this thing we want to find the volume of that cone and remember well volume of a cone is one-third pi r squared h so Volume if you sub in those values volume is one-third times pi times 1.5 squared times 8 Now notice 1.5 squared is 2.25 and I can multiply in any order. I want so I'll multiply one-third times 2.25 times 8 and that gives me 6 I'll tack on the pi at the end to give me a final answer of 6 pi cubic units Here's another example We want to find the exact volume of a regular hexagonal pyramid the height of 8 and a base edge of 10 We know we're dealing with the volume formula one-third area the base times the height We're given the height of the prism. So that's nothing we need to find we already know it We do need to find however the area of the base Now we're given one base edge Now since all of the base edges are 10 if I split it up split up one base edge I get five and Then remember with hexagons that little half triangle is a 30 60 90 and so the apathome here is 5 root 3 and so the base area is 150 root 3 and Now I have everything I need to find the volume of the pyramid So volume is one-third times base, which is 150 root 3 times height, which is 8 and So I can multiply in any order. I choose I'm gonna multiply one-third times 150 times 8 first And then I'll tack on that root 3 at the end So I have an exact volume of 400 root 3 cubic units Another example here. We have we want to find the volume of a regular triangular pyramid the base edge of 12 and a height of 10 So the height isn't shown But we do know that h equals 10 and we need to find the area of one base Given one base edges 12 So since we have a regular triangle, that's another way of saying an equilateral triangle the area of the base We can use side squared root 3 over 4 to get a base area of 36 root 3 and So we substitute those values into the area of pardon me the volume formula one-third times 36 root 3 times 10 Which gives us a volume of 120 root 3 cubic units Here we want the approximate volume of this regular pentagonal pyramid The apathome is 3 the slant height is 5 so again, we're using the volume is one-third base times height formula and We need to find the base area remember the base is a regular pentagon The apathome is 3 and so using trigonometry. We can find half of one side length Which means if I double that up and multiply by five I'll get a perimeter of about 21 point seven nine six I'll use that perimeter then to find the area of the base Then I need to find the height of the pyramid now to find that height Using that right triangle that's made up of the apathome height and slant height But that green theorem says that that height of this pyramid must be four And so therefore I sub in the base area I found I sub in the height that I found and we get a volume of 43.6 cubic units Next hey, let's pretend a cone has a volume of four 480 pi cubic units Its height is 10. How big is its radius? Well, we know we're dealing with this formula because we've got a cone Then we know the volume and we know the height we need to solve for radius So well, I see both sides of the equation have pi so I'll divide by pi I've got that pesky one-third, so I'll multiply both sides of the equation by three and Then I'll divide by 10 and so then I get r squared is 144 Which means the radius must be 12 units Need the volume of this thing Now you'll probably recall that we once found the surface area of this thing And it was a little bit tedious to find the surface area Well finding the volume is a little bit more straightforward Because all we need to do is find the volume of the prism and the volume of the pyramid add them together So prism of course is base times height Pyramid is one-third base times height But the heights of the prism and the pyramid are different so I'll add in little subscripts h1 and h2 First I know the area of the base is just 10 squared easy enough The h1 which is the height of the prism is 14 Now the height of the pyramid is going to be a little bit trickier so I want to find that length and So I'll make myself a right triangle using the radius of the square this Pardon me the lateral edge, which is 13 and then the height So once again, we need the lateral edge We need to find the radius of the base So the radius of the base if the base is 10 Using special right triangles. I know that the radius is 5 root 2 and so now we can find the height Of the pyramid using the good old Pythagorean theorem And so now we have all the information we need for our calculation For this one since approximation is okay.  All right last example. We want the exact volume of this thing What is this thing? Well, this thing is a cone and another cone stuck together. They have the same circular base But that circular base is kind of smushed together. So we've got cone plus other cone I'll use blue to represent the cone on the left and green for the cone on the right So I know I've got one-third pi r squared h plus one-third pi r squared h The radius in both of these cones is the same. It's 3 but the heights are different. So I have blue height green height The blue height on the left is just given to us. It's 4. The green height is unknown however Because we've got a right triangle made up of the radius height and slant height and That 30 degree angle. I know that the height of that cone off to the right is 3 root 3 And now since we want an exact volume, we're going to keep our pi We're going to keep our root 3 as much as possible So I've got one-third pi r squared h plus one-third pi r squared h And I know I can multiply in any order. I choose so I'm going to leave the pi at the end I'm also going to leave the root 3 at the end So one-third 9 times 4 is half sorry one-third of 36 which is 12 pi and one-third times 9 times 3 is 9 so we'd have 9 root 3 pi and Strange as it seems that is our final answer if we want an exact answer. Hey, thanks for watching guys