January 19, 2016 / 4:25 PM / 4 years ago

ECB plans to order banks to tackle bad loans, sources say

The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany, September 3, 2015. REUTERS/Ralph Orlowski

FRANKFURT (Reuters) - The European Central Bank plans to tell euro zone banks how to better manage bad loans, banking officials said on Tuesday, in an effort to resolve an issue that is curbing the region’s economic recovery.

Bad loans have more than doubled across the euro zone since 2009 and stood at nearly a 1 trillion euros at the end of 2014, the International Monetary Fund said last year. Those loans burden banks and make it harder for them to lend.

The ECB has asked a number of banks across the euro zone, including Italy’s Monte dei Paschi di Siena <BMPS MI> and UniCredit, about their non-performing loans. They were selected to establish a representative sample, not necessarily because they are particularly affected, the sources said.

Italian bank shares have tumbled in recent days on fears the ECB had singled out some banks because of their vulnerabilities. But the banking sources said all types of banks across the continent were included in the sample.

The request for information is the first step in a process that will see the ECB define best practices on how to deal with bad loans, encompassing banks with different business models in different jurisdictions.

Those guidelines will eventually be used by the ECB’s supervisory teams when formulating recommendations for the banks on their watch.

The recommendations might range from hiring more staff to deal with non-performing loans or changing internal practices, to making more provisions, reviewing the value of soured loans or even creating a bad bank.

An ECB spokesman said the request for information was “standard supervisory practice”.

A bad loan is typically one that is more than 90-days overdue.

Reporting By Francesco Canepa, editing by Larry King

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