Germany Pushes ECB to Hit Banks With Tougher Bad-Loan Guide

(Bloomberg) -- Germany is leading a drive within the European Central Bank’s oversight arm for tough action this year to deal with nearly $1 trillion of bad loans on banks’ books, according to people with knowledge of the discussions.

A group of northern euro-area countries on the ECB’s Supervisory Board wants to impose firm time limits for writing down existing soured debt, similar to what the central bank did for future nonperforming loans, the people said, asking not to be identified because the deliberations are private. The ECB last month let slip a deadline for proposing such measures, saying banks could face tougher guidelines if they dragged their feet.

“The ECB’s guidance for new nonperforming loans created huge controversy in the market and an intense debate on whether it would result in higher capital requirements for some banks,” said Pablo Manzano, an assistant vice president in European banking at ratings company DBRS. After that controversy, “it seemed like they were retreating on the issue of guidance for the stock,” he said.

The ECB ran into a barrage of criticism from Italian banks and policy makers last year when it came out with a proposed provisioning deadlines for future nonperforming loans. The supervisor stuck to its guns and issued the guidance last month. Banks are given two years to provision fully against the potential loss on unsecured bad loans and seven years for secured.

Action Plan

Germany and its allies want similar deadlines imposed on the mountain of existing bad loans, in addition to other measures already put in place by the ECB, the people said. They face a battle with countries like Italy and Portugal, whose lenders are awash in soured debt.

An ECB spokesman declined to comment.

The European Union has launched a broad assault on bad loans, which it blames for impeding lending and economic growth. Daniele Nouy, head of the ECB’s Supervisory Board, said last month that levels of nonperforming loans remain far too high in some countries. The problem is most acute in Greece, where 46.7 percent of loans are soured; Portugal stands at 17.8 percent and Italy at 12.3 percent. Italian banks hold 221 billion euros ($273 billion) of bad loans, the largest pile in Europe.

North-South Divide

Euro-area lenders have made progress is reducing nonperforming loans, which stood at 793 billion euros in September, down from 955 billion euros a year earlier. That’s not fast enough for the German-led bloc in the ECB Supervisory Board, however.

“In certain countries the successes are small so far, and the share of loans at risk of default is still very high,” Bundesbank Executive Board member Andreas Dombret said in a speech on Thursday. He underscored the importance of the ECB “setting out in detail” what it expects of the banks it oversees.

While a strong north-south divide exists on this issue, it would be disappointing if deadlines for the stock weren’t set out this year in some form, one of the people said. And while the supervisor could quietly take action on individual banks, public guidelines would be better, the person said.

Nouy has said supervisors already disagreed on what effect last month’s guidelines on new bad loans would have on banks. She told EU lawmakers that the central bank would conduct a wide-ranging study if it decides to apply similar guidelines to the existing stock of non-performing loans.

©2018 Bloomberg L.P.