LDN - Business

Stung by criticism, ECB seeks to defuse conflict on bad loans

[November 07, 2017] FRANKFURT (Reuters) - The European Central Bank sought on Tuesday to defuse a conflict with European and Italian authorities over its plans for ridding euro zone banks of bad loans, opening the door to working with other institutions and tailoring its approach to each bank.

The ECB has come under fire for setting blanket rules for how much money banks should set aside for new unpaid loans and is due by March to draft guidelines for existing soured credit, a much bigger issue at nearly 900 billion euros.

Critics say the new rules encroach on the European Parliament's prerogatives and fail to account for countries, such as Italy, where justice is slow and the economic recovery fragile.

But President Mario Draghi appeared to extend an olive branch on Tuesday, calling for a "joint effort" between regulators, supervisors and national authorities.

"Currently the most important issue here is tackling non-performing loans," Draghi, an Italian, told an ECB conference.

"We therefore need a joint effort by banks, supervisors, regulators and national authorities to address this issue in an orderly manner," Draghi said.

His comments raised the chance the ECB's guidelines on legacy loans will be influenced by a legislative proposal that the European Commission is preparing in parallel on the matter, as reported by Reuters last month.

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European Central Bank (ECB) President Mario Draghi holds a news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, October 26, 2017. REUTERS/Kai Pfaffenbach

For Italian banks, sitting on a quarter of the euro zone's bad loans pile, the main fear is that the guidelines for new bad loans, which give banks seven years to provide for credit backed by collateral and two years for unsecured debt, may be applied to legacy ones too.

Speaking after Draghi, the ECB's chief supervisor Daniele Nouy sought to assuage those fears, stressing the approach to legacy loans will be "case by case".

"For the legacy (NPLs), well, the situation is very diverse, so it has to be only case by case assessment and solutions," Nouy told a conference. "We are working with all the banks that have too high levels of non performing exposures."

Sources had told Reuters the ECB was rethinking its approach to legacy NPLs, due in part the Italian backlash.

(Reporting by Francesco Canepa; Editing by Balazs Koranyi and Raissa Kasolowsky)

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