EU adopts plan to tackle bad loans and could increase capital buffers

BRUSSELS (Reuters) – European Union finance ministers on Tuesday called for faster offloading of bad loans by EU banks and recommended that more money be set aside by banks to protect them troubles.

FILE PHOTO – The famous euro landmark is seen through the lights of a tram passing in front of the former headquarters of the European Central Bank (ECB) in Frankfurt, Germany January 19, 2016. REUTERS / Kai Pfaffenbach

The decade-long financial crisis left European banks with nearly € 1,000 billion in non-performing loans (NPLs), reducing their ability to lend and slowing Europe’s economic recovery.

The amount of NPLs has declined slightly in recent months, but at too slow a pace, European Commission Vice-President Valdis Dombrovskis told a press conference after finance ministers agreed to a new plan to tackle the problem.

“We must speed up our actions,” he said, welcoming the ministers’ plan.

EU states have called on the Commission, which is responsible for proposing legislative changes at EU level, to consider adjustments to banking rules that would increase the powers of supervisors and force lenders to increase the buffers of equity against the risk of loans going badly.

Dombrovskis said the strategy will include giving banking supervisors more powers to “actively encourage banks to solve the problem.”

As part of this plan, the European Central Bank could force banks to increase their buffers against existing NPLs when it deems they are not sufficient.

Banks could also be forced to automatically set aside more capital for new loans when they expect the level of NPLs to exceed acceptable levels.

Banks have warned of measures that could be excessive and increase costs unduly.

“Supervisors already have broad powers to address perceived shortcomings in the banks they oversee,” AFME, a financial lobbying group, said in a statement, saying there was no evidence that supervisory powers should be increased.


Ministers also proposed measures to improve secondary NPL markets, which are currently underdeveloped and provide little incentive for banks to offload bad loans.

Only 80 billion euros of NPL were sold last year.

Ministers hope that a better functioning market would push up the price of NPLs, which are currently sold at low percentages of their face value, creating huge holes in the balance sheets of the banks that unload them.

An earlier plan to create an EU ‘bad bank’ that could have absorbed large chunks of bad debt at higher prices was scrapped, in part because EU states with healthier banks, like Germany, do not wish to use taxpayers’ money to help lenders in most of the southern European countries where the bad debt problem is most severe.

But ministers agreed on Tuesday on a more cautious plan to create national “asset management companies” (SGAs) that could help develop the bad debt market.

Asset management companies established in Spain and Ireland during the 2008-2012 financial crisis bought bad loans from banks at around 50% of their face value.

This would be a higher price than what the market is willing to pay in Italy, the EU country with the highest level of NPL in absolute terms, where UniCredit CRDI.MI, the largest bank in the country, this year sold 17.7 billion euros of bad loans at 13% on average of their gross face value.

But EU officials said the price of bad loans depends on country conditions and payback time and can vary widely from country to country. The commission will set by the end of the year “asset valuation rules” for AMCs.

AMCs could also be turned into failing domestic banks that acquire bad loans at prices much closer to their face value. But that would constitute state aid and entail strict conditions, restructuring of banks which have discharged bad debts and losses for bank shareholders and junior bond holders, EU officials said.

Ministers also pushed for changes in national insolvency regimes to speed up the recovery of bad debts from debtors.

Report by Francesco Guarascio @fraguarascio in Brussels; additional reporting by Francesco Canepa in Frankfurt; Editing by Catherine Evans? Jermey Gaunt

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