Italy Objects

ECB under fire over bad loans

ECB, Bad loans
European Parliament President Antonio Tajani is leading fight against the ECB's proposed rules on bad loans. Source:Reuters

Opposition is growing in the European Parliament to a German-backed proposal by the European Central Bank that would require banks in the EU to resolve problem loans within set time limits or face increased capital requirements.

The new guidelines would require EU banks to fully provision for future unsecured non-performing loans within two years, and within seven years for loans that have collateral. The measure, which is designed to reduce Europe’s bad-loan problem – now estimated at about €844 billion ($982 billion) – was originally expected to go into force in January.

Under the proposed rule, the ECB, which regulates big EU banks, would have the right to require banks to raise more capital if they failed to meet the deadline for provisioning bad loans.

But some members of the European Parliament, led by Antonio Tajani, its president, have come out in opposition to the directive. Italy has the highest amount on non-performing loans in the EU at about one-fourth of the total. There is concern that rules affecting new loans also will be applied to the stock of existing loans, forcing banks to sell them for a fraction of their face value.

Two Italian lawyers in the parliament’s legal services office, Matteo Menegatti and Luca Visaggio, are arguing that because the proposed ECB directive has “a legally binding character” on all banks in the EU, the measure requires legislation to be passed by the European Parliament before it can be formally adopted as policy by the ECB.

The ECB directive was supported by German MEPs, who have been opposed to the adoption of EU-wide deposit insurance.

The ECB argues that because banks can request exemption from the rule under certain circumstances, it is not binding and thus does not require parliamentary approval.

After the opposition from Mr. Tajani and others, Danièle Nouy, the ECB’s banking supervisor, hinted on Thursday that the central bank is ready to compromise by including some of the parliament’s objections, but didn’t state exactly what changes she envisioned. She also said that the timing of the directive, originally scheduled for January, could be postponed.

The ECB directive was supported by German MEPs, who have been opposed to the adoption of EU-wide deposit insurance as long as there is such a huge backlog of non-performing loans in Mediterranean countries such as Italy, Greece, and Cyprus.

“An ECB directive that is valid for all is better than individual decisions,” said Burkhard Balz, a member of the Christian Democratic Union faction in the parliament. He argued that if ECB regulators made decisions on a case-by-case basis, it would be even tougher for the debt-laden Italian banks.

Jakob von Weizäcker, a member of Germany’s Social Democratic party, said that while he supports the ECB in principle on the urgent need to deal with problem loans, he would have preferred a more subtle way of solving the problem on a case-by-case basis rather than with a sweeping directive.

Green party MEP Sven Giegold said he would have preferred the bad loan problem to be settled by a new law adopted by parliament, but as long as that is not the case, “I think it is more transparent if the ECB adopts a directive.”

While the ECB insists that the proposed directive is aimed only at future loans, the Italians in particular are worried that the same rules will be applied later to the existing bad loan portfolios at banks.

Those fears were fanned when the ECB said in a statement outlining the new directive that “in addition, by the end of the first quarter of 2018, ECB Banking Supervision will present its consideration of further policies to address the existing NPLs, including appropriate transitional arrangements.”

With Ms. Nouy saying a compromise is possible, MEPs were awaiting a revised proposal that could make the resolution mechanism more voluntary than the current draft.

Ruth Berschens is Handelsblatt’s bureau chief in Brussels and Yasmin Osman covers banks for Handelsblatt in Frankfurt. To contact the authors: berschens@handelsblatt.com and osman@handelsblatt.com.

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