21st Mar 2018

Commission steps up proposals against bad loans

  • Almost half of loans by Greek banks are not being repaid, the highest rate in the EU (Photo: Eric Maurice)

The European Commission presented on Wednesday (14 March) new proposals to continue cleaning EU banks' coffers of their piles of bad loans, while reassuring member states over reducing risks on the sector.

The so-called non-performing loans (NPLs) - the loans which individuals and companies are more than 90 days late repaying - still represent 4.4 percent of all loans in the EU, a total of €910bn which is "well above pre-crisis levels" according to the commission.

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NPLs still represent 46 percent of all loans in Greece, the most affected country, and 32 percent in Cyprus.

In Italy, where they almost brought down the country's fourth largest bank Monte dei Paschi de Siena in 2016, NPLs still represent 12 percent of all loans despite a 25-percent drop in one year.

"NPLs is an issue [for the EU], a coordinated approach is needed," Valdis Dombrovskis, the commission vice president for the euro, told journalists.

He said that his proposals would "free up a capacity of banks' balance sheets and allows them to expand lending to businesses and households."

"It is a contribution to creating growth and jobs," he said, as the EU is trying to build up on the bloc's economic expansion, the strongest in a decade.

Dombrovskis presented four sets of measures, both "too speed up reduction of NPLs and prevent them from building up in the future."

The commission first proposed to establish a common minimum level of funds that banks will have to set aside to cover potential losses. Banks that do not apply the measure would see deductions from the own fund.

The commission also proposed to facilitate out-of-court procedures to help banks recover the value from loans that are guaranteed with collateral. The measure would apply only to business, and not to individuals who borrowed from their bank.

A third proposal is to help develop a secondary market on which bank would sell their NPLs, by easing rules on credit servicing and transfer of loans. Consumer protection would be "ensured by legal safeguards and transparency rules," the commission said.

The EU executive also put forward a proposal to set up asset management companies in member states.

The plan is part of a wider move to reduce risks in Europe's banking system and the eurozone economy, before EU countries agree to go towards more integration of the economic and monetary union (EMU).

The future of the EMU will be discussed by EU leaders at their summit next week, with an aim at reaching an agreement of the next step at their June summit.

The completion of the banking union - including a mechanism to save failing banks - is one of the priorities, along with the creation of European monetary fund.

But EU countries are still divided between those, led by countries like Germany and Netherlands, that want 'risk reduction' before talking about 'risk sharing', and those, like France or Italy, that want to increase 'solidarity' between member states.

"With today's package we are taking an additional steps towards lowering risks in the banking sector," Dombrovskis said, insisting that his proposals went beyond what member states agreed to do in 2016.

"We hope it can form a basis for a balanced deal on completing the banking union ahead of the June summit," he insisted.


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