ECB instructs banks in how to shed mountain of loans

London - The European Central Bank (ECB) ramped up efforts to tackle the mountain of soured loans that weighs on many eurozone banks, while acknowledging that it may be years before victory can be declared.

“The ‘wait-and-see’ approach, too often observed in the past, has not solved the issue,” the ECB said on Monday.

The Frankfurt-based central bank, which began overseeing eurozone lenders in 2014, said it “expects banks with high levels of NPLs to implement targets for reducing those NPLs that are both realistic and ambitious.”

The ECB issued draft guidelines on Monday to help eurozone banks get out from under €1.1trn of doubtful and non-performing loans.

The proposals address the “main aspects regarding strategy, governance and operations” needed for banks to reduce their stocks of bad loans, and set out best practices that will “constitute the ECB’s supervisory expectations going forward.”

Daniele Nouy, head of the ECB’s supervisory arm, has made tackling non-performing loans a priority from the start.

The problem, which is particularly acute in Italy, has been exacerbated by factors including the anemic economy, “poor banking practices, flawed legal frameworks for debt recovery and a lack of capacity in the judiciary system,” Nouy said in June.

Nouy last year turned to Ireland’s head of banking regulation, Sharon Donnery, to lead the charge on soured loans, citing that country’s “good work” on the issue.

Donnery heads a working group on resolving loans in partial or full default. Irish banks have trimmed their non-performing loans from €53bn in June 2014 to €31bn in March 2016.

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