ECB preparing fresh non-performing loan proposal - Nouy

MADRID (Reuters) - Euro zone banks need to reduce their high running costs and strengthen their balance sheets, ECB supervisory chief Daniele Nouy said on Tuesday, adding that fresh proposals on dealing with a long legacy of bad loans was coming.

European Central Bank's chief supervisor Daniele Nouy speaks during a banking conference in Lisbon, Portugal, May 17, 2016. REUTERS/Rafael Marchante

Euro area banks sit on around 900 billion euros (686 billion pounds) worth of non-performing loans, nearly a decade after the start of Europe’s debt crisis, limiting their ability to extend new loans and holding back growth.

Although policymakers argue that getting banks to sell, wind down or transfer such loans to a ‘bad bank’ must be done at national level due to differing regulations across the 19-member bloc, some analysts suggest the ECB could set targets for banks or at least issue best practice guidelines.

“We still have a lot of work to do to address legacy assets, particularly non-performing exposures ... and we will fast come with certain proposals,” Nouy told a banking conference in Madrid.

The ECB declined to elaborate on Nouy’s comments.

The ECB last year set up a task force on non-performing loans, headed by Irish central bank deputy governor Sharon Donnery. The group is expected to release some of its general findings around mid-year.

Some analysts have suggested the ECB could even buy non-performing loans in the same way that it buys asset-backed securities, but such an idea has not been publicly embraced by policymakers and most reject the idea.

Nouy acknowledged that sub-zero ECB rates are a drag on bank profits but said lenders benefit from improved economic growth, lower funding costs and better liquidity conditions that allow both households and corporate clients to repay debt.

She added that banking costs remained too high in proportion to their incomes and lenders would actually benefit from a wave of consolidation as there are too many banks in the bloc.

Addressing concerns that the ECB is still forcing banks to amass more capital, Nouy said the ECB was comfortable with the current minimum capital requirement, known as Pillar 1.

Still, some executives fear that more capital increases could still come, possibly systemic buffers, countercyclical buffers and increased risk weights on government bonds held by banks.

“I think we need clarity on regulation,” Santander Executive Chairman Ana Botin told the conference. “I was just reading analysts reports from a few days ago where the estimates were that the European banks still needed 120 basis points more capital.”

“I think we need to push for acceleration, if there is going to be new demands, let’s know what they are exactly,” Botin said. “Let’s implement them as fast as possible, (because) I think this would help bank valuations.”

Additional reporting by Angus Berwick; Editing by Robin Pomeroy