Dodgy Loans

EU Sets Plan for Bad Banks

Belgien, Bruessel, Europaparlament
The EU finally has a plan of action, but will it work?

European Union finance ministers approved an “action plan” to create “bad banks” in member states with a crippling amount of bad debts after calls for an EU-wide institution for this purpose failed to gain traction.

The ministers also called for new rules on bank capital and disclosure to prevent the accumulation of bad loans, and this drew an immediate response from the banking industry in Germany.

The Association of German Banks cautioned that there should be “no undue bureaucratic strain on small and medium-sized banks” resulting from the new rules. In addition, the association said, any new rules on lending should “not lead to constraints on the funding of business.”

The industry group said it supported the reduction of nonperforming loans in southern European countries. “But this should not be at the expense of the lending capacity of healthy banks in this country,” the association added.

“Some moneylenders grow anxious easily when their interests are at stake.”

Wolfgang Schäuble, German finance minister

According to the industry, nonperforming loans in Germany account for only 3 percent of total assets. This contrasts with 16.4 percent in Italy, 39.2 percent in Cyprus and 47.8 percent in Greece. Across the EU, bad loans are estimated to total nearly €1 trillion.

German Finance Minister Wolfgang Schäuble, who was among those resisting a cross-border bad bank, showed little patience with the industry complaints. “Some moneylenders grow anxious easily when their interests are at stake,” he said with a note of sarcasm.

In Mr. Schäuble’s view, banks should not push financial products onto customers if they are not willing to invest their own money in them. He was referring to the bad advice given by Italian bankers who peddled risky bonds to customers as secure savings for retirement. When the authorities adopt policies against this kind of practice, then banks grow concerned, Mr. Schäuble said.

According to the action plan approved Tuesday, the member states needing it should establish a bad bank to take over the nonperforming loans and bundle them into securities to sell on the capital market. The ministers mandated the European Commission to work up common rules for the structure and management of these bad banks.

For the preventative measures, the ministers authorized the European Central Bank Banking supervisory mechanism to require additional capital buffers for bad credits as needed.

The decisions on Tuesday capped a long debate on how best to handle the bad debts. In January, the head of the European Banking Authority, Andrea Enria, said there was an urgent need to take action on the EU’s bad debts.

Current EU rules call for losses to be shared across the board for big banks whose collapse would endanger the European financial system, but are less stringent for smaller banks.

With nonperforming loans at 5.4 percent of bank assets across the bloc, the EU ratio was three times higher than in other major global regions, he said at the time. Bad loans make it difficult to grant new credit and prevent follow-on investment, hitting those countries hardest that are most in need of it.

At the ministers’ meeting in April, however, Mr. Schäuble rejected a single bad bank for the European Union because conditions varied among the various countries. He recommended national bad banks and that is the option approved this week.

At this meeting, the ministers also discussed Italy’s decision last week to rescue or liquidate three of the country’s banks at a cost of billions without a “bail-in” from all creditors.

Current EU rules call for losses to be shared across the board for big banks whose collapse would endanger the European financial system, but are less stringent for smaller banks, which fall under the bloc’s general rules limiting subsidies.

“This distinction is hard to explain,” Mr. Schäuble said on Tuesday. “We have to work on a certain harmonization of the bankruptcy regimes.”

The ministers charged the EU commissioner for competition, Margarethe Vestager, to come up with suggestions by the end of the year for bringing the subsidy rules for small banks into line with the stricter rules for the bigger banks.

 

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

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!