* Banks would have less time to set aside money against bad debt
* Revised plan could be agreed by EU envoys next week
* Bad loans down but still saddling southern banks
By Francesco Guarascio
BRUSSELS, Oct 26 (Reuters) - European Union states are close to a deal on rules for banks saddled with bad loans, according to diplomats and EU documents, with a plan that would give banks less time to build a backstop against new soured debt.
Euro zone banks have yet to recover from the 2008 financial crisis, and this year their shares dropped more than 20 percent . Italian banks have fallen nearly 30 percent and seen increased losses after a eurosceptic government took office in Rome in June.
The new rules, if adopted, could cause them further trouble. They would have only seven years, instead of eight, to build a backstop that would fully covered new bad loans secured by collateral, under an EU proposal seen by Reuters.
The plan, prepared by the Austrian presidency of the European Union, would amend legislative proposals made by the European Commission in March for common minimum levels of money banks need to set aside against bad loans.
EU governments broadly agree on the overhaul, an EU internal document said. One negotiator said he was “very confident” EU envoys would agree a compromise at a meeting next week.
Despite a gradual offloading of bad loans, euro zone banks still hold 731 billion euros ($831.22 billion) of debt they might not be able to recover, according to European Banking Authority’s latest available data.
Assets of banks that do not build a sufficient backstop would automatically be devalued under the proposed rules. The rules would apply only to new loans.
“Loopholes” that would have allowed lenders to set aside less money for some loans have also been eliminated from the proposal, a diplomat involved in the negotiations said.
In a concession to countries where banks hold higher levels of bad debt, EU governments are backing an extension to three years from two that banks have to cover new unsecured, riskier loans that go bad.
Non-performing loans make up an average of just 3.6 percent of total lending at EU banks. But in Greece they account for nearly half of loans and in Italy almost 10 percent.
Italy is pushing for nine years to build buffers against losses on loans that are secured by immovable collateral, such as houses or commercial properties, confidential documents show. Southern countries back that proposal and a diplomat said it could be accepted by all 28 governments.
But in return for this concession, the new measures would be backdated to March 2018, effectively shortening the period banks would have. Austria had proposed applying the new measures only to new loans originated after the rules are adopted.
The European Parliament, which would have to agree with changes proposed by EU government, is divided over the reform, said Roberto Gualtieri, one of the leading lawmakers on the matter. If no agreement is reached before European elections in May, the overhaul may be shelved. (Reporting by Francesco Guarascio, editing by Larry King)