July 11, 2017 / 9:57 AM / in 2 years

EU set to approve strategy to tackle bad loans

* Plan may up capital buffers for lenders saddled with sour credit

* Banks call for caution as they fear higher costs

* Ministers want to improve NPLs markets in bid to raise prices

By Francesco Guarascio

BRUSSELS, July 11 (Reuters) - European Union finance ministers will adopt on Tuesday a plan to speed up the unloading of bad loans held by EU banks and will recommend measures that could increase capital buffers and costs for lenders that expect high levels of soured credit.

A decade-long financial crisis has left European banks holding around 1 trillion euros of non-performing loans (NPLs), reducing their ability to lend and slowing down Europe’s economic recovery.

“The European action plan on non-performing loans to be adopted today is a major step to tackle the problem,” the European Commission Vice-President in charge of the issue, Valdis Dombrovskis, told reporters before a meeting of finance ministers in Brussels.

Ministers will invite the EU Commission, which is responsible for proposing legislative changes at EU level, to consider tweaks to banking rules that would increase supervisors’ powers and force lenders to raise capital buffers against the risk that loans could turn sour.

Dombrovskis said the strategy will include giving bank supervisors more powers to “actively encourage banks to address the problem”.

Under the plan, the European Central Bank could force banks to step up their buffers against existing NPLs when it deems they are not sufficient.

Banks could also be obliged to automatically set aside more capital for new loans when they expect the level of NPLs to grow beyond acceptable levels.

At this stage ministers are inviting the European Commission to “consider” legislative changes after having assessed their impact.

Banks warned against measures that could be excessive and unduly increase costs.

“Supervisors already have wide-ranging powers to address perceived deficiencies in the banks they supervise,” AFME, a financial lobbying group, said in a statement, arguing that there is no evidence supervisory powers need to be increased.

Ministers will also propose measures to improve secondary markets for NPLs, which are currently underdeveloped and provide little incentive for banks to unload their bad credit.

Just 80 billion euros of NPLs were sold last year.

Ministers hope that a better-functioning market would push up the price of NPLs, which are currently sold at small percentages of their nominal values, creating huge holes in the balance sheets of banks which offload them.

A bolder plan to set up an EU “bad bank” that could have absorbed big chunks of NPLs at higher prices was dropped. EU states with healthier banks, like Germany, are not keen to use taxpayers’ money to help lenders in the mostly southern European countries where the bad loan problem is worst.

Ministers agreed a more prudent blueprint to set up national “asset management companies” (AMCs) that could help develop the market for bad loans. Governments could participate in AMCs but only under strict state aid rules intended to avoid distortions to the common EU market.

States were also invited to amend national insolvency regimes to speed up the recovery of bad loans from debtors.

Reporting by Francesco Guarascio @fraguarascio; Editing by Catherine Evans

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