Bank Supervision

ECB could crack down on sour-loan lenders

Geldscheine
The trick is sorting the good from the bad. Source: DPA

The European Central Bank could crack down on the euro zone’s huge stock of unpaid loans if it is not satisfied with banks’ own plans to deal with the matter, a top ECB supervisor said.

“That depends on how successful banks are with their reduction of NPLs,” said Ignazio Angeloni, an ECB supervisory board member, in an interview with Handelsblatt. “We are currently carrying out a rigorous assessment of banks’ plans. In some instances, we will be calling for more effort, more energy and more action.” For banks that are deemed to be failing in addressing this issue properly, “we will have to make our expectations clear,” Mr. Angeloni added.

The ECB’s bank supervision hasn’t yet decided whether its guidelines for new non-performing loans, or NPLs, will extend to existing ones, Mr. Angeloni said. It’s still possible that banks’ own steps to reduce outstanding bad loans will suffice for the regulators, he added.

“Fundamentally, if individual banks’ plans are entirely satisfactory, we won’t have to act,” Mr. Angeloni said. The ECB will decide on the matter in the first quarter of 2018.

Euro-zone banks are still shouldering around €844 billion ($983 billion) of bad debt, much of it accumulated in the financial crisis after 2007. This debt mountain tends to discourage banks from extending new loans, which in turn weighs on economic growth.

“In some instances, we will be calling for more effort, more energy and more action.”

Ignazio Angeloni, ECB banking supervisor

Last month, the ECB unveiled a set of guidelines on how banks should deal with new NPLs. The publication sparked a fierce backlash in Italy, home to one-third of the euro zone’s bad loans, against new ECB rules forcing banks to set aside more money against loans that sour.

The ECB’s latest guidelines, which give banks seven years to make provisions for newly-soured credit backed by collateral and two years for unsecured debt, are not binding. However, banks have to explain any deviation, and may face higher capital demands.

The main concern for Italy is that its banks, if asked to set aside more reserves, may cut back on lending or even be forced to raise capital. This task has eluded Italian bank Monte dei Paschi di Siena and two regional lenders in recent months, triggering state interventions.

The ECB supervisors were reported to be working on similar guidelines for existing bad loans, but are suspected of softening their approach due to a coordinated response by Italy’s banking lobby, government and central bank. Top European parliamentarians said the new rules endangered economic growth and went beyond the ECB’s remit.

Yasmin Osman covers banks and banking supervision for Handelsblatt. Jeremy Gray is an editor for Handelsblatt Global in Berlin. To contact the authors: osman@handelsblatt.com, j.gray@vhb.de.

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