11 Apr 2017
We welcome the publication of the ECB’s guidance on non-performing loans (NPLs) which requires adherence to either the RICS Red Book or the European Valuation Standards (EVS).
The guidance clarifies the inaccurate statement that has been circulating in some parts of the industry that the European Central Bank favours EVS above other valuation standards.
Immovable property collateral should be valued, adhering to European and international standards. National standards can also be accepted if they follow similar principles. (…) These include the European Valuation Standards EVS-2016 (Blue Book) and the Royal Institution of Chartered Surveyors (RICS) standards.
The misinterpretation comes from the ECB’s 2014 AQR (Asset Quality Review) guidelines, where it was stated that:
Real estate should be valued in line with European Standards EVS-2012 (Blue Book) and other international standards such as the Royal Institute of Chartered Surveyors (RICS) guidelines – where a conflict is seen EVS2012 will apply.
The ECB had already made clear to us that it was not their intention to establish any hierarchy between standards, and the new guidance on NPLs takes that position into account. It is important to mention that this new guidance is directly applicable to European banks without end-date, whereas the AQR was a one point-in-time assessment in preparation for the ECB to take on the direct supervisory task of the most significant credit institutions in Europe. The AQR ran from March to June 2014 and the manual was intended to be applied only with this particular purpose and task in mind, and only directed at national supervisors.
During the public consultation on the draft guidance we called for consistency in the application of valuation standards. Being a professional, public interest body, our main role is to qualify, set standards and regulate members according to strict professional and ethical requirements. The RICS Red Book provides a practice framework for the consistent application of International Valuation Standards (IVS) throughout the world. This means that valuations according to the RICS/IVS are consistent and comparable across EU Member States, something that no other valuation standard provide at the same level. This is also relevant for reducing transaction costs in the field of cross-border valuations.
If the above mentioned consistency is in place, the distinction between ‘European’ and ‘international’ becomes unnecessary. It is our view that high level valuation standards should continue to converge across the EU, and beyond, as real estate markets continue to expand across national and international boundaries. This does not rule out the possibility of supplementary standards or guidance at European or national level, and indeed the suite of RICS guidance for its members contains various country-specific elements, such as the national Red Book chapters which help the application of the practice statement at local level and in line with local legislation.
About the ECB guidelines on NPLs
A number of banks in Member States across the Euro area are experiencing high levels of non-performing loans (NPLs). Addressing asset quality issues is one of the key priorities for European Central Bank (ECB) banking supervision. The guidance marks an important step in this direction. It outlines measures, processes and best practices which banks should incorporate when tackling NPLs, an issue which should be a priority for banks. Although the guidance is non-binding in nature, it is intended to clarify the supervisory expectations regarding NPL identification, management, measurement and write-offs in areas where existing EU legislation or guidelines lack specificity. The ECB expects banks to fully adhere to the guidance in line with the severity and scale of NPLs in their portfolios.
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