A Plan to Address Europe’s Trillion-Euro Problem

Euro note
Picture source: Reuters.

EU finance ministers are set to adopt an action plan to address nearly €1 trillion of bad loans  weighing down the balance sheets of primarily southern European banks, according to a draft proposal obtained by Handelsblatt.

Under the plan, member states would set up national asset management companies to administer bad debts. The European Commission, the EU executive, will develop a blueprint for these asset management companies, often called “bad banks,” by the end of 2017. The blueprint will lay out EU-wide rues on capital requirements, management structures and the amount of assets bad banks can hold.

Financial institutions in Portugal, Italy, Greece and Cyprus have strained under a mountain of bad debt since the 2008 financial crisis. In Portugal, bad loans make up 19.5 percent of bank balance sheets; in Italy, the figure is 15.9 percent. Though bad loans are concentrated in southern Europe, the associated risks are a burden on “the entire economic and financial system of the European Union,” the finance ministers warn in their proposal.

Europe’s bad debts have long been recognized as a problem, but action stalled over disagreements between EU and German officials on the right approach. The head of the European Banking Authority, Andrea Enria, proposed pooling Europe’s bad debts into a single EU asset management company, but Germany was opposed, arguing that non-performing loans are a problem only in some countries.

The EU finance ministers ultimately agreed on a proposal by their German colleague Wolfgang Schäuble to establish uniform guidelines for individual countries to set up bad banks. They will discuss the plan at a meeting Tuesday.

Markus Ferber, a member of the European Parliament with Germany’s conservative Christian Social Union, welcomed the move to action: “The EU Commission has put the problem on the back burner for far too long. It’s good that something is finally happening.”

The EU finance ministers also want to force banks to take more precautions against the build-up of bad loans in the future. Under new rules, non-performing loans would automatically be deducted from the capital reserves of banks, forcing them to hold more cash back from lending.

The plan also calls for stricter lending guidelines. By the end of 2018, The European Central Bank and the European Banking Authority will publish a new set of guidelines that applies to all banks regardless of size. The current guidelines only apply to the 128 banks in the euro zone that are supervised by the European Central Bank.

Banks would face stricter transparency standards as well. The European Securities and Markets Agency and the European Banking Authority will issue new rules by the end of next year.

But the banking sector has met the raft of new rules with skepticism. A source old Handelsblatt that the “very far-reaching proposals” would amount to “to a deep intervention in lending.”


Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the author:

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