The Strategist

ECB sets out to deal with bad loans in Europe

11/08/2017 - 11:49

On Tuesday, the European Central Bank (ECB) tried to tame a conflict with European and Italian authorities about its plans to deal with problem loans by opening the doors to work with other institutions and adapting its approach to each individual bank, Reuters writes.

The ECB has been heavily criticized for setting general rules on how much money banks should allocate for new unpaid loans. This is explained by the need to reduce the amount of bad debts, which now exceeds the target level, amounting to about EU 900 billion.

Critics, including the Italian Minister of Economy Pier Carlo Padoan and the Italian head of the European Parliament Antonio Tajani, fear that the new rules will force banks to reduce lending or lead to the need to increase capital.

They also say that the ECB's directions impinge on the prerogatives of the European Parliament and do not take into account countries such as Italy, where justice is rather slow, and economic recovery seems relatively fragile.

However, ECB President Mario Draghi called on regulators, supervisors and national authorities to make "joint efforts". Draghi, an Italian himself by nationality, said at the ECB conference that problem loans are the most important problem of the European banking system at the moment.

"Therefore, we need joint efforts of banks, supervisors, regulators and national authorities to solve this problem in an orderly manner," Draghi said.

Eurogroup’s head Jeroen Dijsselbloem said on Monday that there is a "general agreement" between the euro zone finance ministers about the ECB's approach.

But Italian Minister Padoan disagreed, saying on Tuesday that the plan went "beyond the control" set for the ECB, and called for a "reasonable method and time frame" that would not create a "new fragility."

Earlier this year, the chairman of the European banking organization European Banking Authority (EBA), Andrea Enria, said that the European Union should have a "bad" bank, which will collect "bad" loans worth EU 1 trillion in total. Now they are hampering economic growth in the region, says Enria. At the moment, sale of overdue loans is difficult due to the lack of a proper market, which led to too low prices for them and hinders the efforts of banks to get rid of this cargo.

The asset management company, acting as a "bad" bank, will try to sell "bad" loans at their estimated "real economic price," rather than by market value. If the European "bad" bank cannot get rid of the loan within three years, then it will have to accept the market price.

In the banking system of the European Union about 1.06 trillion euros of non-performing loans, representing 5.4% of total loans. This is more than three times higher than in Japan or the United States. Only Italian banks account for almost 276 billion euros of "bad" loans.