Exclusive: ECB to guide
banks on working off bad debt before setting targets -
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[June 23, 2016]
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) - The European
Central Bank is planning to give euro zone banks non-binding
guidance by the end of 2016 or early 2017 to cut their bad debt
pile, raising the heat on lenders but not forcing their hand,
The ECB, which supervises 129 of the biggest banks in the euro zone,
will eventually set confidential quantitative and qualitative
targets but not all will necessarily come in writing, the sources
This would give banks some flexibility and suggests that the ECB
will at least initially rely heavily on persuasion.
Weighed down by around 900 billion euros ($1 trillion) of bad debt,
banks have delayed fixing this legacy of Europe's debt crisis,
worried that write-offs would lead to losses, limiting dividends and
also executive pay.
Regulators are keen to give banks a push, however, as a huge stock
of bad loans depresses bank valuation, increases funding costs and
ultimately holds back economic growth, countering the very stimulus
the ECB's monetary policy arm is trying to provide.
Indeed, the ECB estimates 7.1 percent of euro zone bank loans were
not performing at the end of last year, nearly five times the level
in the United States. Italy and Greece are among the top laggards.
The focus on tailor-made non-binding guidance in the ECB's first
exercise focused on bad debt suggests that the supervisor will avoid
any heavy handed steps, easing concerns that banks would have to
quickly sell off bad debt but potentially prolonging Europe's bad
Another source added that no decision has been made so the ECB's
thinking could still evolve, particularly regarding the timeline.
The ECB declined to comment for this article.
The sources said that banks not complying could see the guidance
firmed up in a regular regulatory review, possibly feeding into
their capital requirements.
"Some banks just sit on bad loans and hope for better times," a
source with direct knowledge of the ECB's deliberations said. "Bad
loans just sitting on the books need to be written off or banks will
have to increase provisions to maybe 50 or 70 percent."
Italy's UniCredit <CRDI.MI> has nearly 80 billion euros of
non-performing loans, 15 percent of its loan book, while Intesa
Sanpaolo <ISP.MI> had 33 billion euros at the end of the first
quarter. Greek banks are meanwhile sitting on around a 100 billion
euros of bad debt.
Analysts warned that a rapid sale or write down would require many
banks to raise capital since provision levels are just over 40
percent on average and current market pricing of such debt would
result in losses.
Supervisors, though keen to move fast, accept that the legal
framework is still patchy with big variations in insolvency,
foreclosure and tax regulations among euro zone members.
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The headquarters of the European Central Bank (ECB) is illuminated
with a giant euro sign at the start of the "Luminale, light and
building" event in Frankfurt, Germany, March 12, 2016. REUTERS/Kai
Regulators also recognize that even as quick write offs would heal lenders
quicker, the unavoidable one off shock would counter the ECB's monetary policy
aim of boosting lending to lift growth and inflation, a potential source of
conflict between two separate arms of the bank.
"There is a market globally for NPLs," another source said. "But it is not a
liquid market because it depends heavily on national legislation, like how
quickly the collateral can be regulated, or how quickly the NPLs can be sold,
how one can approve the covenants, etc."
Though some banks may be given timelines and provisioning target levels, the
sources played down the significance of these numerical targets, arguing that
aim is to get banks to become more transparent and active in dealing with bad
The ECB will ask banks to set up processes to deal with bad loans with executive
or board level oversight, and the new rules will treat differently bad loans on
the books for years than recently soured debt.
Banks will be measured on how much collateral they have repriced, for instance
to reflect worse economic conditions, and how many corporate borrowers they have
reassessed to estimate their chances of repaying their loan, another source
Information will also be demanded about whether the banks have exercised
forbearance -- an agreement with a borrower to delay a foreclosure -- and for
The supervisor will also ask how many loans banks have re-classified, for
example from being performing to non-performing, and on how many they have taken
action to recover the money.
(Additional reporting by Mark Bendeich Editing by Jeremy Gaunt)
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