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Western EuropeOctober 30 2017

Time to tackle the vexed question of European NPLs

While proposals by Europe’s regulators to tackle the continent’s bad loans are already meeting resistance from some quarters. The issue must be tackled sooner rather than later.
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Non-performing loans (NPLs) are a drain on bank lending and ultimately on an economy. Everyone can agree on that. More open to debate is whether guidelines are needed for the resolution of NPLs and to contain risks at bank level.

In Europe, both the European Central Bank (ECB) and the European Commission believe guidance is necessary, and they are working on additional measures to address the issue. The latest proposal is the ECB’s October addendum to guidelines published in March – and this has caused a storm.

The proposal calls for lenders to cover 100% of any NPLs – as defined by the European Banking Authority (EBA) – that occur from January 2018. Banks have two years to reach the full coverage level for all new unsecured NPLs and seven years for all new secured NPLs. The consultation period for the addendum runs until December 8, with a public hearing on November 30, but plenty of debate has already kicked off.

There are suggestions that the ECB’s latest plans are particularly harsh upon those countries with the highest shares of NPLs – although only new NPLs will, as of yet, be required to be fully covered. Still, there is already resistance to the plans from Italy, the home of three of this year’s high-profile EU bank failures and an extraordinarily high level of bad loans.

Italy’s finance minister, Pier Carlo Padoan, has voiced “doubts” over the “method and substance” of the proposal, while former prime minister Matteo Renzi has said the plans could hurt the country’s economic recovery. Others complain that the measures are so strict they could put lenders in peril; now there is talk of softening some of them.

But the debate does not end there. The ECB’s proposal has faced criticism by the European Parliament and it also goes beyond an earlier recommendation on NPLs made by the EU’s Council of Ministers, while at the same time the European Commission is also working on NPL legislation. There is a danger of conflicting approaches developing from different EU institutions.

NPLs came down in June, according to EBA definitions, to an EU average of 4.5%, but this means lenders in the bloc are still sitting on some €865bn of bad loans – too high a level for lenders to move slowly. But it is questionable whether higher provisions would lead to lower NPLs.

The issue over responsibility is another matter, and one for EU institutions to settle. Either way, it is the result that matters – and this calls for EU banks to act, regardless of which set of rules is applied. 

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