FRANKFURT (Reuters) - Euro zone banks may get a reprieve until 2021 to fully implement European Central Bank guidelines on treating new soured loans, an ECB document showed on Thursday, a retreat from an earlier proposal for a more aggressive treatment of bad debt.
The ECB’s long-delayed guidelines of new non-performing loans will go into effect on April 1, but the supervisor may hold off for several years before forcing lenders to build provisions for loans going bad after its cut-off date, the ECB said in a statement.
Weighed down by some 750 billion euros ($927.08 billion)worth of existing bad loans, euro zone banks are struggling to overcome the legacy of the region’s debt crisis, a drag on new lending that undercuts the stimulus the ECB is trying to provide through rock-bottom borrowing costs.
Hoping to ease concerns about its original proposal, the ECB said the guidelines were non-binding expectations and would merely serve as the basis for case-by-case dialogue with banks on how they provision against bad debt.
“The result of this dialogue will be incorporated, for the first time, in the 2021 Supervisory Review and Evaluation Process,” the ECB said in a statement.
“Banks should use the time to prepare themselves and also to review their credit underwriting policies and criteria to reduce the production of new non-performing loans (NPLs), in particular during the current benign economic conditions.”
According to the guidelines, banks will have two years to fully provision for bad non-secured debt. For secured loans the deadline will be seven years.
But in another change from its original proposal, the ECB will ask for provisions on secured debt only from the third year, instead of a linear build up.
“The ECB is still shying away from moving quickly on addressing NPLs,” said Guntram Wolff of Brussels-based think tank Bruegel. “It is important to give time, but another two-and-half-year delay is bad news for returning Europe to full health.”
The ECB’s guidelines come just a day after the European Commission announced its own measures on bad debt.
Under its proposal, which needs the approval of EU states and lawmakers, banks will have two years to fully cover unsecured loans and eight years to cover secured debt.
That proposal involves only newly granted loans. The ECB’s guidelines involve any loan already on the books and classified as non-performing after April 1.
“The addendum is less severe than expected,” Credit Suisse said in a note to clients. “The good news for secured loans is that it is mandatory as of year three.”
“(It is) a better-than-expected outcome that is positive for Italian banks, in our view,” it added. “Small Italian banks in particular should benefit from the news.”
The new guidelines were intended to take effect on Jan. 1, but the bank extended the deadline to revise the proposal after fierce criticism, particularly from Italy, whose banks have accumulated more bad debt that most in Europe.
Bankers and European parliamentarians, particularly from Italy, fear that forcing banks to set aside more money against bad loans will strangle lending in economies that are already missing out on the economic expansion taking hold elsewhere in the euro zone.
They argued that the ECB’s original proposal was contrary to EU legislation because it set blanket rules for an entire sector, a move outside a supervisor’s prerogative.
“The addendum is non-binding and will serve as the basis for the supervisory dialogue between the significant banks and ECB Banking Supervision,” the ECB said.
($1 = 0.8090 euros)
Additional reporting by John O'Donnell; editing by Larry King