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ECB unveils compromise solution for banks' soured loan problem

FRANKFURT (Reuters) - European Central Bank supervisors will give euro zone banks extra time to set cash aside against their bad loans if their pile of soured debt is particularly high, the ECB said on Wednesday.

FILE PHOTO: The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

It was announcing long-delayed guidelines aimed at bringing down a 721 billion euro ($837.01 billion) pile of unpaid debt, mostly inherited from the 2008-12 economic crisis and concentrated in Greece, Cyprus, Portugal and Italy.

The guidelines were the result of a compromise among supervisors after an earlier proposal to set the same timeframe for all banks had met with resistance from bankers, lawmakers and even within the ECB itself, as reported by Reuters last month.

Under the new rules, the ECB’s Single Supervisory Mechanism (SSM) will set “bank-specific supervisory expectations” for the provision of non-performing loans (NPLs), while using benchmarks to ensure consistency.

“The bank-specific supervisory expectations are based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratio and main financial features,” the ECB said.

Its aim “over the medium term” is to achieve the same coverage for old non-performing loans as is the case with new ones, for which banks have to provide in full.

No further detail was given.


Wednesday’s short announcement was the supervisor’s last-ditch effort to salvage the final piece of a three-year effort to draw a line under the euro zone’s debt and banking crisis.

The chair of the supervisor, Daniele Nouy, has until the end of the year to establish her legacy before stepping down, followed a month later by her deputy Sabine Lautenschlaeger.

But the issue of unpaid loans has driven a rift between a handful of countries where banks still have a large amount of bad loans such as Italy, which did not bail out its banks during the crisis, and the rest.

This has caused the ECB to delay the publication of the new rules, originally expected in March, and the supervisor said in April it was considering whether further policies were necessary at all.

The SSM has already introduced rules on loans that go unpaid, giving banks seven years to provide for them if they are backed by collateral and two if they are not.

It had initially envisaged applying these rules to the stock of legacy loans.

But an impact-assessment study by staff in the ECB’s monetary policy arm highlighted risks to the financial system because some banks would be forced to set aside billions of euros to provide for their soured credit.

This has proven an elusive feat for weaker banks such as Italy’s Monte Paschi, which needed state help in late 2016 after failing to raise money on the market.

The SSM, which is formally separated from the rest of the ECB, had come up with a more benign outcome by assuming banks would continue reducing their stock of bad loans, as they have done for the past two years.

Reporting By Francesco Canepa; Editing by Balazs Koranyi and Gareth Jones