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EU Council says ECB does not have mandate for its bad loan measures

BRUSSELS (Reuters) - The European Central Bank does not have the mandate for its plan to ask euro area banks to set aside more cash to cover bad loans, the European Union Council said in a legal opinion, in a further blow to the ECB proposal.

To prevent a pile-up of new bad debt on top of an existing stock of sour loans worth nearly 850 billion euros ($1 trillion), the ECB wants to introduce new guidelines including a two-year deadline for lenders to raise provisions from January for any newly classified non-performing unsecured debt. [nL8N1ME32P]

The draft plan is out for public consultation until next week and has run into opposition from various quarters including the European parliament and now the EU Council, the bloc’s other legislative body which represents its members’ governments.

The council’s non-binding document, seen by Reuters and dated Nov. 23, said the law governing the ECB’s supervisory powers over euro zone banks “prevents the ECB from adopting instruments of soft law, such as the draft addendum to the ECB guidance to banks on non-performing loans.”

The ECB cannot adopt measures “intended to ensure compliance by banks of criteria for minimum provisioning which are not, or not yet, the object of harmonization by the EU legislator,” it said.

This echoes the stance of the European Parliament’s legal services that the ECB would be overstepping its authority with its proposed guidelines. [nL5N1NE6WA]

EU rules say supervisors can impose binding capital measures on specific banks but not on the entire banking system.

The chair of the ECB supervisory body, Daniele Nouy, said guidelines do not equate with laws. She has defended her plan but hinted at the possibility of postponing its entry into force.

The document will be discussed by EU states’ economic envoys on Tuesday when they meet to prepare the monthly gathering of EU finance ministers, EU officials said.

“EU states usually follow legal opinions, although final decisions are political,” one official told Reuters.

After a meeting of euro zone finance ministers on Nov. 6, the chair Jeroen Dijsselbloem said there was “a general agreement” in favor of the ECB approach on bad loans.

Italy’s Finance Minister Pier Carlo Padoan later disagreed and called for more time for banks to adapt to stricter requirements.

Italian lenders are among the most affected by bad loans’ woes and fear too quick and high provisioning targets could hit their balance sheets.

EU states agreed in July on a plan to tackle the build-up of NPLs and gave the EU executive commission a mandate to present legislative measures which could require banks to provide for NPLs with more cash for newly issued loans. The commission will make its proposal next year.

Warring EU institutions who fail to resolve conflicts through other means can take such matters before the European Court of Justice.

($1 = 0.8382 euros)

Reporting by Francesco Guarascio; Editing by Raissa Kasolowsky