Andrea Enria, head of the European Banking Authority, defended his call for the creation of a European bad bank, warning in an interview that the need to start winding down more than €1 trillion in non-performing loans sitting on bank balance sheets is becoming increasingly urgent.
At 5.4 percent, Mr. Enria noted that the ratio of non-performing loans to total loans in European banks is about three times higher than other major global regions. “The good news is that the ratio is coming down, but the decrease is extremely slow,” Mr. Enria told Handelsblatt. “There is an urgent need for policy action.”
Without a solution, Europe was at risk of taking longer than Japan took to recover from its own simmering banking crisis in the 1990s, Mr. Enria said, noting the Japanese banking crisis took more than 15 years to solve. “If we continue at this pace, we will take longer than Japan to complete the adjustment and reach pre-crisis levels.”
European leaders are set to discuss Mr. Enria’s proposal at a summit in Malta in April. The European Commission and central banking officials have been open to the idea of pooling Europe’s bad debts into a single authority, but German officials at the Bundesbank and Finance Ministry have resisted, fearing that pooling debts could also mean risks for German taxpayers, despite most of the bad debts sitting in banks in southern and central Europe. Andreas Dombret, head of supervision at the Bundesbank, has said he is open in principle but has “a number of concerns.”
Mr. Enria stressed that a European bad bank wouldn’t necessarily mean forcing taxpayers across Europe to bail out the bad debts of a few members. Any state aid that would be needed if bad loans have to be written off would still be the responsibility of each country.
“The whole structure is designed to avoid any form of mutualization of losses or sharing of risks,” Mr. Enria said. “Any state aid that might be necessary would be addressed exclusively at the national level.”
If there can’t be a common authority, Mr. Enria at the very least called for common rules for existing national authorities charged with winding down bad loans in E.U. countries. A number of E.U. members already have or are considering their own bad banks, including Italy and Portugal.
“At a minimum, it would be important to define common European blueprints for national asset management companies,” he said.
Separately, Mr. Enria warned against a wave of international deregulation when it comes to financial rules. He urged the Trump administration in the United States, which is likely to repeal the Obama era Dodd-Frank law that stepped up regulation after the 2008 crisis, not to backtrack on international commitments.
“In my opinion international standards should be respected. If there are deviations from these standards, that would be a cause of concern. The lesson from the crisis is that any process of deregulation in a single country poses the danger of exporting risks to other countries and into the global system,” he said.