Danish Finanstilsynet flags weaknesses in smaller banks’ NPE backstop calculations and internal controls

Danish Finanstilsynet has published findings from a set of inspections indicating that several smaller banks have insufficient procedures for calculating the minimum coverage requirement for non-performing exposures (the NPE backstop) under the Capital Requirements Regulation. The review highlights gaps in how selected institutions identify NPEs, determine the calculation base, and report and control the figures, with potential direct impacts on capital positions. Across the inspected institutions, deficiencies included missing or incomplete written procedures, unclear allocation of responsibilities, limited management reporting, and ineffective internal controls. Key procedural gaps cited include the calculation method and completeness checks, documentation standards for data sources and handling, precise NPE classification and recording, and control design and execution. The inspections also found material calculation errors, including incorrect application of the transition arrangement where exposures extended through changes in terms and conditions should generally fall out of the transitional treatment, and omissions of certain off-balance-sheet exposures such as undrawn commitments and guarantees that can only be excluded if immediately cancellable without conditions or notice. Where banks rely on shared data centres for the calculation, Finanstilsynet stressed that accountability remains with the institution and noted a need for banks to challenge received calculations, engage with data centres to correct errors, and apply manual adjustments or compensating measures until systematic issues are resolved.