4.2.1 Internal capabilities/self-assessment

Credit institutions should perform a comprehensive self-assessment to evaluate the actual situation and the steps to be taken internally to address any gaps in the internal capabilities to manage NPEs.

Institutions should fully understand and assess:

• a) The magnitude and drivers of their NPEs:
• i. the size and evolution of NPE portfolios at an appropriate level of granularity, which requires an appropriate grouping of the exposures, as outlined in section 5.2.3;
• ii. the drivers of NPE inflows and outflows, by portfolio where relevant;
• iii. other potential correlations and causations.
• b) The outcomes of NPE actions taken by the credit institution in the past:
• i. the types and nature of actions implemented, including forbearance activities;
• ii. the effectiveness of those activities and related drivers.
• c) Their operational capacities (processes, tools, data quality, IT/automation, staff/expertise, decision-making, internal policies and any other relevant area for the implementation of the strategy) in relation to the various steps involved in the process, including but not limited to:
• i. early identification of NPEs;
• ii. forbearance activities;
• iii. impairments and write-offs;
• iv. collateral valuations;
• v. recovery, legal process and foreclosure;
• vi. management of foreclosed assets, where relevant;
• vii. reporting and monitoring of NPEs and of the effectiveness of NPE workout solutions.

C redit institutions should perform a comprehensive self-assessment covering at least the items listed in paragraph 29 on an annual basis to determine strengths, significant gaps and areas of improvement required to reach NPE reduction targets.

Credit institutions should report the outcome of the comprehensive self-assessment to the institution’s management body and the competent authority.

Credit institutions should consider seeking expert views on their operational capabilities to manage NPEs from the institution’s risk management and control functions or from external sources on a periodic basis.