Europe to improve disclosure of ‘bad loans’ for all banks

Economic Affairs Commissioner Pierre Moscovici and Vice-President for the euro Valdis Dombrovskis said that the Commission is not considering for the time being changing the benign interpretation of state aid rules to support European banks. [European Commission]

European authorities will prepare by the end of next year enhanced disclosure requirements on bad loans as part of an action plan to tackle the risk of non-performing loans (NPL).

EU economic and finance ministers (Ecofin Council) are expected to adopt today (11 July) a plan to decrease the high level of bad loans held by banks in member states.

The Council bluntly warns that “the negative effects of current high NPL ratios in a substantial number of member states can pose risks of cross-border spill-overs in terms of the overall economy and financial system of the EU and alter market perceptions of the European banking sector”, according to the action plan seen by EURACTIV.

The goal is therefore to digest the one trillion euro in NPLs accumulated over the last few years, and avoid throwing more on top of the pile of assets.

Ten countries register more than 10% of their GDP in NPLs and transparency is seen as a key element for the supervision and handling of NPLs.

Italy averts banking crisis with EU deal on bad loans

Italy and the European Union reached agreement on Tuesday (26 January) to help Italian banks sell bad loans, averting a major banking crisis which had been brewing for over a year.

In order to dispel the doubts affecting the European banking system, the ministers call on the European Banking Authority, together with the European Securities and Markets Authority and national authorities, to strengthen disclosure requirements for all bank assets, and not only the systemic ones.

As part of the enhanced requirements, EU sources explained that they will look carefully at the evolution of the bad assets.

The document lacks far-reaching proposals, including setting up an European asset management company (’bad-bank’) to absorb the bad loans.

An EU official insisted that this is a “highly divisive” idea. He added that those countries that set up an AMC, such as Spain, Slovenia and Ireland, held quite a homogeneous type of asset (mortgage credits).

But the added value of having a European ‘bad bank’ to extract all ailing assets from European lenders would decrease because of different national situations and the variety among small and medium-sized enterprises loans.

Another source added that the idea of a European ‘bad-bank’ was killed off during the informal Ecofin in Malta last April.

Italian finance minister eyes 'bad bank' to clean up risky loans

Italy is considering setting up a state-backed “bad bank” to help clean up its banking sector, Pier Carlo Padoan said in a newspaper interview on Sunday.

EBA chairman Andrea Enria is one of the main backers of the idea.

In Valletta, ministers barely took note of Enria’s comments in that meeting as he spoke at the end of the debate.

Instead, the action plan invites the European Commission to come up with a blueprint for the potential set-up of national AMCs by the end of this year.

This blueprint should establish common principles for the assets allowed to be extracted from ailing banks, for governance and operational features of such a body, and clarify its design according to what the EU’s banking resolution and state aid rules permit.

In order to be prepared in case new NPLs pile up, the member states recommend that the Commission consider automatic deductions of banks’ own funds as prudential backstops for newly originated loans.

This proposal, which was included after intense debate, mirrors steps taken in the US where backstops are automatically discounted for ailing assets after a number of years.

As part of the action plan, the EBA will also come up with new guidelines on NPL management for all banks by summer 2018.

The situation of European banks affected by low profitability and the challenge posed by FinTech players and NPLs, raised some doubts again after three Italian banks and a Spanish lender required assistance last month.

Smaller banks

EU authorities are broadly satisfied with the banking union and how the EU Bank Recovery and Resolution Directive (BRRD), for systemic lenders, operated in the cases of Banco Popular and Banca Monte dei Paschi.

Monte dei Paschi bailout accepted with severe restructuring plan

The European Commission and Italy agreed on a bailout for embattled bank Monte dei Paschi that would pave the way for the injection of billions of euros.

EU banking resolution rules pass credibility test with Banco Popular

The new Single Resolution Board intervened for the first time early this morning (7 June) to save Banco Popular, a troubled Spanish bank whose deposits were protected without using taxpayers’ money after Banco Santander decided to acquire its assets.

But member states are considering further steps after Italy needed further measures.

Eurozone finance ministers (Eurogroup) discussed on Monday (10 July) a further harmonisation of national insolvency frameworks so smaller banks going into resolution face similar rules across Europe.

Liquidation of Italian banks shows limits of banking resolution rules

The European Commission’s approval of a €17 billion aid package for an orderly wind-down of Italy’s Veneto Banca and Banca Popolare di Vicenza, has sparked doubts about the strict application of banking resolution rules.

Critics warned that Italy bended the rules as Rome first said that Banca Popolare di Vicenza and Veneto Banca were systemic in order to request a precautionary recapitalisation allowed by the BRRD.

As this option failed, the government changed its tack and said the banks did not represent a risk for the European financial system.

Accordingly, Italy requested winding down the two banks under national rules, injecting €17 billion to minimise losses especially among senior bondholders.

Despite new EU resolution rules promised to end using taxpayers money to save banks, the Commission authorised the public rescue given the weight of the two banks in the Veneto region.

Some ministers said during the Eurogroup meeting that the benign interpretation of state aid rules set up in 2013 for financial institutions should be revised.

The executive said that it is not considering changing the rules for now as it wants to assess all possible side effects first.

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