ECB gets tougher on bad loans amid banks' $1trn pile

For the first time, the banking supervisor laid down time limits for how quickly lenders should set aside capital for loans that turn bad. The guidelines, published on Thursday, are the latest attempt by authorities to deal with a problem that still limits banks’ ability to lend and turn a profit a decade on from the financial crisis.

Lenders should fully cover the unsecured portion of a non-performing loan within two years, with a seven-year limit for secured credit, the ECB said. The guidelines for loans that go bad from April 1 will be applied to banks on a case-by-case basis. Still, banks will only have to account to the ECB for their bad-debt provisioning from early 2021, the Frankfurt-based central bank said.

“Banks need to understand that this is a very important issue they need to be tackling, so regardless of the dates that are set out,” we’d “expect banks to be giving non-performing loans a very high priority,” Sharon Donnery, deputy governor of the Central Bank of Ireland and head of the ECB’s high-level group on NPLs, told reporters on a call. They shouldn’t wait until 2021 before dealing with problem debts, she said.

The measures have been the subject of intense lobbying and pitted Italy, which has the region’s biggest pile of soured loans, against countries including Germany, which have sought to extend the guidelines to existing NPLs. Italian lawmakers and financiers slammed the ECB’s original proposal, saying it would endanger bank lending and Europe’s economic recovery.

'Much softer'

The ECB’s document follows draft rules from the European Commission published on Wednesday. Under those rules, banks would have two years to set aside enough capital to fully cover unsecured loans that go bad, with a deadline of eight years for loans backed by collateral. The Commission’s proposal applies to new loans issued on or after the start date of March 14.

Though the ECB’s time frames are “harsher” than the Commission’s, its guidelines are “much softer” in that banks have some three years to comply, Fabrizio Bernardi, an analyst at Fidentiis Equities, said in a note.

The ECB guidelines apply only to debt that turns sour in the future and not to the eurozone’s existing bad-debt pile of almost €800bn.

Banks will be asked to build up the capital provisions over time to avoid what the Frankfurt-based institution called “cliff-edge effects.” The time limits laid out by the ECB match its proposed guidelines published in October - which may suggest that Italian banks’ lobbying has had little effect.