EU lawmakers adopt softer bad loans cover rules for banks

BRUSSELS (Reuters) - European Union lawmakers backed new rules on Thursday that would soften requirements on the money that banks must set aside to cover potential losses from new debt that turns sour.

European Union flags are seen outside the EU Commission headquarters in Brussels, Belgium November 14, 2018. REUTERS/Francois Lenoir

The changes adopted by lawmakers in the economic affairs committee of the European Parliament will need approval from EU governments before they become law.

They represent an easing of the requirements from a deal reached in October by EU governments, which in turn had softened an earlier European Commission proposal, and met with opposition in some quarters for being too lenient.

“This is not a prudent approach and does not lead to the risk reduction we need to achieve in European banks’ balance sheets,” Sven Giegold, a Green lawmaker who voted against the watered-down text, said.

In line with the compromise struck by EU states, parliamentarians backed a text that would require banks to fully provide for unsecured loans three years after they turn bad. The commission had proposed a two-year term.

The date for the new requirements to enter into force will not be backdated to March 2018 as had been proposed by the commission, the text agreed by lawmakers said, in line with the compromise reached by EU states in October.

The parliament also confirmed the a plan to give banks nine years to build a full buffer against bad loans that are secured by immovable collateral, like houses or commercial properties.

Loans secured against less safe movable collateral would have to be fully provided for within seven years from when they are recorded as non-performing.

The sweetener from the parliament came in the provisioning calendar. Under the text voted in the EU assembly, banks would have less strict requirements to cover for bad loan losses in the build-up of their full buffers.

EU states agreed that banks should provide for at least 35 percent of their exposure to unsecured loans two years after they became bad, before a full coverage after three years. But the parliament has canceled the intermediate requirement.

For secured loans, the timetable to build up a full coverage would be less strict in intermediate years before the final-term requirement.

Reporting by Francesco Guarascio; Editing by Kevin Liffey and Alexander Smith