ECB's guidelines on bad debts hit Italian banks, irk Rome

(Reuters) - News that the European Central Bank wants euro zone banks to set aside more money for their soured loans sank shares in Italian lenders and sparked a rebuke from one of the country’s top politicians on Tuesday.

The skyline with its financial district and the headquarters of the European Central Bank (ECB) are photographed in the early evening in Frankfurt, Germany, December 4, 2018. REUTERS/Kai Pfaffenbach

The ECB will set a target date for each of the banks it supervises to make a full provision for its bad debts, both existing and new, a source familiar with the matter said.

The date may differ from bank to bank and will be an expectation for the medium term rather than a binding requirement, the source added, confirming a report in Italian newspaper Il Sole 24 Ore.

The ECB declined to comment.

The tougher than expected recommendation by the regulator battered shares in Italian banks, which are saddled with the largest amount of impaired loans in the single currency bloc.

Banks in the euro zone’s third biggest economy held 159 billion euros (£142.05 billion) non-performing loans at the end of June, accounting for 9.7 percent of all their loans.

Italy's banking sector index .FTIT8300 was down 1.9 percent at 1430 GMT, with Monte dei Paschi BMPS.MI down 7.5 percent. Banco BPM BAMI.MI, BPER EMII.MI and UBI Banca UBI.MI were each down more than 4 percent.

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Monte dei Paschi’s stock had already suffered a sell-off on Monday, after the bank said the ECB had asked it to set aside more money to cover for losses on its bad loans by 2026.

The ECB last year said it would give banks seven years to fully provision for newly soured secured debt and two years for unsecured debt. But it did not put a numerical target on the stock of existing bad loans at the banks it supervises, which totalled 657 billion euros in mid-2018.

While banks expected stringent requirements, many hoped the supervisor would not specify a date and would instead opt for a more vague formulation, focusing on newly soured loans instead of the whole stock of soured debt.

If the same criteria are applied for both new and existing bad loans, banks would be given at most until 2026 to write off their stock of bad debt, which has weighed on their balance sheets since the bloc’s debt crisis.

Italian lenders supervised by the ECB would have to write off another 72 billion euros of soured loans in the medium term to increase provisioning to 100 percent, according to Bank of Italy data based on June 2018 figures.

The ECB will apply a “comply or explain” principle under which a bank can deviate from a guideline if it can give a reasonable explanation, daily Il Sole 24 Ore said. However, it could apply stricter guidelines on other issues to banks that deviate on bad loan principles.

Deputy Prime Minister Matteo Salvini accused the ECB of harming Italian banks.

“The new attack by the ECB supervisor on the Italian banking system and Monte dei Paschi shows once again that the banking union ... not only does not make our financial system more stable, but it causes instability,” Salvini said in a statement.

The far-right leader accused the ECB of overriding decisions made by the European Commission, adding it raised a “fundamental question” about the central bank’s supposed impartiality.

The ECB last year said the expectations would be based on a benchmarking of comparable banks and guided by individual banks’ current non-performing loans ratio and financial characteristics.

Italian lenders Intesa Sanpaolo ISP.MI, UBI Banca, Banco BPM and BPER sought to reassure investors, saying they did not see any significant impact on their current financial targets from the ECB's new guidelines.

Additional reporting by Balazs Koranyi in Frankfurt and Crispian Balmer in Rome; Editing by Jason Neely and Mark Potter