ROME, Oct 3 (Reuters) - The European Central Bank plans to ask euro zone banks to set aside enough cash to cover 100 percent of their non-performing loans over the next several years, a draft document of its new guidelines seen by Reuters showed on Tuesday.
Euro zone banks are sitting on nearly 1 trillion euros’ worth of bad debt, clogging up their balance sheets and holding back lending - a headache for the ECB as weak credit growth offsets the stimulus it is trying to provide through low interest rates.
The central bank has struggled for years to force lenders to rid their books of non-performing exposures, or NPEs, mostly built up during the course of Europe’s debt crisis, and the new rules are part of a broader push.
From Jan. 1, the ECB will give banks two years to set aside money to cover 100 percent of the value of their non-performing unsecured debt and seven years to cover all of their secured debt, the guidelines show.
“The application of the backstops should not result in cliff edge effects but should rather be implemented in a suitable gradual way by banks from the moment of NPE classification until the moment when 100 percent prudential provisioning is expected,” the draft showed.
“For the secured backstop, banks should therefore assume at least a linear path for the backstop building up to 100 percent over the seven years,” the ECB wrote in the draft.
The ECB declined to comment on the draft, which is dated Sept. 1. It plans to release the guidelines on Wednesday.
Across the euro zone, banks had on average set aside enough money to cover 45 percent of all non-performing exposures in the first quarter.
The new rules may hurt Greece, Italy and Cyprus the most, as their banks hold the biggest portion of non-performing debt.
In the draft, the ECB said that while the guidelines are non-binding, banks are expected to explain any deviations and should report their compliance to supervisors. (Additional reporting and writing by Balazs Koranyi; Editing by Hugh Lawson)