The SFSA intensifies review of credit institutions' management of non-performing loans

The Swedish Financial Supervisory Authority (SFSA) has recently announced that it will intensify its review of credit institutions' management of non-performing loans (NPLs). This initiative follows the European Banking Authority’s (EBA) guidelines, which since 2018 have introduced a threshold of 5% NPL ratio, triggering requirements for strategies and governance measures to manage these risks.

A Nordic Perspective

The SFSA’s decision aligns with a broader trend in the Nordic region, where supervisory authorities have increased their focus on strengthening financial institutions' resilience. Similar reviews have been conducted or are being considered across the region, emphasizing the need for robust governance frameworks and proactive strategies to address elevated NPL ratios. This reflects a coordinated effort to ensure financial stability and minimize systemic risks in line with EBA guidelines.

Background to EBA Guidelines

The EBA’s guidelines (EBA/GL/2018/06) aim to strengthen banks' ability to manage non-performing loans. According to the guidelines, banks with an NPL ratio exceeding 5% must develop a strategy to reduce their non-performing exposures. This strategy must include:

1. Governance and Control:
   • Establishing clear accountability and reporting structures for NPL management.
   • Implementing risk management frameworks specifically tailored to NPL handling.
2. Operational Measures:
   • Streamlining resources and processes to manage non-performing loans effectively.
   • Implementing systems to analyze and optimize recovery of these assets.
3. Strategy:
   • Setting clear goals for gradually reducing the proportion of non-performing exposures.
   • Exploring alternative strategies such as portfolio sales, restructuring, or outsourcing NPL management.

Focus Areas

The review will particularly focus on sections 4 and 5 of the EBA guidelines, which address:

• Strategy Development: Credit institutions must present concrete strategies to reduce NPL levels below 5%.
• Governance and Control: Banks must implement adequate governance and control measures to handle NPLs effectively.

The SFSA has emphasized that failure to comply with these guidelines could result in actions from the supervisory authority, including requirements for additional capital buffers or operational changes.

What Does This Mean for regulated Credit Institutions?

1. Increased Supervision and Reporting Requirements:
   • Swedish credit institutions with an NPL ratio above 5% can expect to be reviewed by the SFSA, including requirements to present robust strategies and measures.
2. Strategic Implications:
   • Banks will need to invest in developing and implementing effective systems to manage NPLs, including analytical tools and recovery resources.
   • Failure to address these requirements risks both operational and financial sanctions.
3. Opportunities:
   • Banks that successfully implement effective strategies to reduce NPLs may gain access to cheaper financing and improved credit ratings.
   • This also opens opportunities for collaboration with external parties specializing in managing or acquiring NPL portfolios.

Revel Partners has deep expertise in supporting credit institutions to address the challenges of NPL management and meet regulatory expectations. Recently, we have collaborated on innovative NPL securitisation solutions, helping institutions reduce NPL levels while unlocking new funding and capital opportunities. Our work spans:

• NPL Portfolio Analysis: Evaluating portfolios to identify actionable strategies for optimizing recovery and compliance.
• Strategic Framework Development: Designing governance structures and operational strategies tailored to regulatory requirements.
• Partnership Facilitation: Bringing together credit institutions and investors to manage or acquire NPL portfolios in mutually beneficial arrangements.

Revel Partners is committed to working collaboratively with Nordic financial institutions to navigate these evolving regulatory landscapes effectively. Our recent projects demonstrate our ability to deliver practical and impactful solutions in this critical area.