October 26, 2017 / 3:37 PM / 2 months ago

ECB pledges careful approach to bad loans after Italian backlash

* Constancio says rules on NPL stock will be different

* Defends guidelines on new bad loans

* Comments confirm exclusive Reuters report

By Francesco Canepa

FRANKFURT, Oct 26 (Reuters) - The European Central Bank will be “careful” in its drive to reduce the euro zone’s 843 billion euro ($990 billion) pile of bad loans, its vice-president said on Thursday, after Italian complaints that it would hurt the economy.

Vitor Constancio defended the ECB’s latest guidelines, which force banks to set aside more money for new loans turning sour. But he said upcoming rules on soured credit left over from the financial crisis - a big issue for Italy - will be “different” and “careful”.

Reuters reported last week that ECB supervisors were having to rethink their approach on the stock of soured credit, initially based on the same targets set for new non-performing loans (NPLs), due to a backlash from Italy.

“We’re looking of course very careful(ly) because it’s different to deal with new NPLs and deal with targets for the whole stock,” Constancio said at the ECB’s regular news conference.

He described the latest guidelines on new loans, which give banks seven years to provide for credit backed by collateral and two years for unsecured debt, as “reasonable” and in line with new accounting standards.

But Constancio said they would be applied with some flexibility.

“Compliance with these targets will be subject to the supervisory dialogue,” he said. “The banks... can explain that they have done the utmost to comply and could not do it.”

Announced this month, the ECB’s guidelines on new bad loans met with a fierce backlash in Italy, where the banking lobby, government, central bank and even top European parliamentarians said the new rules jeopardised economic growth and went beyond Frankfurt’s remit.

The main worry for them is that Italian banks, if asked to set aside more money, may curtail lending. Some may even need to raise capital - a task that has eluded Monte dei Paschi di Siena and two regional lenders in recent months, triggering state interventions.

The ECB is now due to come up with a new set of guidelines by March for provisions on existing bad loans - an even thornier issue in Italy, where lenders are sitting on a quarter of the euro zone’s total pile of bad loans.

Supervisors had been working on scenarios closely reflecting the guidelines on new NPLs but were now rethinking their approach due to the outcry in Italy, the sources told Reuters.

Italian banks’ non-performing exposure, which includes unpaid loans and other types of soured credit, fell by 50 billion euros ($59 billion) to 212 billion euros in the three months to June, the ECB quarterly statistics showed this week.

This was a greater drop than in any other country in absolute and relative terms. ($1 = 0.8532 euros) (Reporting By Francesco Canepa; Editing by Hugh Lawson)

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