European Central Bank Banking Supervision sets out risk-based streamlining of non-performing loan supervision including multi-year NPE coverage expectations from 2026

European Central Bank Banking Supervision published a Supervision Newsletter describing how it will make its supervision of non-performing exposures (NPEs) more agile and risk-based as non-performing loan (NPL) levels have fallen, while keeping supervisory pressure on banks with material problem-loan stocks. From 2026, NPE coverage expectations will no longer be communicated as an annual recommendation in Supervisory Review and Evaluation Process decisions and will instead be set out in a single operational act covering several years. Banks with immaterial stocks of older NPEs within scope of the ECB’s policies will no longer need to meet NPL coverage expectations or report on them. The ECB will also refocus scrutiny of requests to reduce shortfalls against minimum coverage expectations by concentrating more supervisory attention on banks submitting more material requests, while keeping the level of scrutiny unchanged for other banks. As context, NPEs subject to loss coverage expectations declined from nearly EUR 500 billion in 2020 to around EUR 180 billion at end-2024, and in the 2025 SREP cycle nine banks received targeted Pillar 2 Requirement add-ons for provisioning shortfalls (12.4 basis points on average, weighted by risk-weighted assets), with the average NPL ratio (excluding cash balances and central bank reserves) around 2.2% over the last three years. The newsletter also points to extending the ECB’s harmonised NPL approach to less significant institutions and to placing greater emphasis on sound lending practices to help keep NPL levels low over time.