January 31, 2017 / 4:22 PM / 3 years ago

Germany throws cold water on EU 'bad bank' plan to tackle soured loans

BRUSSELS (Reuters) - Germany sees no benefit in setting up a European ‘bad bank’ to help ailing lenders in some EU countries to offload their soured loans, a German government official said on Tuesday, pouring cold water on a plan prepared by the EU banking agency.

Chairperson of European Banking Authority (EBA) Andrea Enria attends a debate with the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium September 26, 2016. REUTERS/Yves Herman

The chairman of the European Banking Authority (EBA), Andrea Enria, proposed on Monday to create a publicly-funded asset management company to scoop up some of a trillion-euro-mountain of non-performing loans (NPLs). The NPLs have become a brake on the euro zone’s economic growth.

The plan was quickly welcomed by Klaus Regling, the head of the euro zone bailout fund, the European Stability Mechanism, as a way to address woes that have contributed to lower euro zone bank lending to companies and householders since the financial crisis that hit Europe a decade ago.

But Germany, the bloc’s largest economy, did not share that view.

“It is not clear what the added value of a European bad bank would be,” a German government source told Reuters, adding that NPLs are a problem “only in certain countries”.

Berlin has been traditionally reluctant to back projects intended to share economic and financial risks among euro zone nations, fearing they could result in high costs for German taxpayers.

More than one-quarter of all EU NPLs are stuck in Italian banks, while in Greece and Cyprus NPLs account for nearly half of all banking loans. Portuguese and Slovenian lenders are also saddled with almost 20 percent of soured loans.

But in Germany, only 2.6 percent of loans are considered to be at risk of not being repaid, according to EBA figures.

Enria’s plan is meant to speed up the sale of bad loans by creating a more efficient secondary market where a publicly-funded bad bank, or asset management company, would buy the loans at higher prices than their market value and try to sell them for a limited period, like three years.

Under the plan, if NPLs were not sold in the foreseen period, banks would need to write them off, and the resulting losses would hit creditors and taxpayers of the bank’s home country in the case of public intervention.

A spokeswoman for the European Commission welcomed the EBA proposal on Tuesday, saying it provided a useful contribution to work already underway to address the problem of NPLs.

Reporting by Francesco Guarascio and Tom Koerkemeier; Editing by Gareth Jones

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