ECB Prods Lenders on Bad Loan Pile With Bank-Tailored Guidelines

(Bloomberg) -- The European Central Bank will give eurozone lenders another prod in efforts to tackle bad debt levels that it says are still “far too high” compared with other regions.

The ECB will communicate its expectations to banks for the reserves they should hold against non-performing loans, which weigh on their profit and ability to lend. Those guidelines will be tailored to the individual lenders’ levels of bad debt, and those lenders’ “financial features,” but will still be applied “in a consistent way across comparable banks,” the ECB said in a statement Wednesday.

People familiar with this plan said last week that it bridged the German-Italian rift on how to address bad debt piles by potentially allowing more lenient treatment of certain troubled lenders. Italy has resisted a swift clean-up of soured loans that might threaten the solvency of its banks through massive writedowns. In the meantime, the euro area’s 768 billion euros ($897 billion) of bad debt is hampering economic growth.

The ECB published guidance in March for how quickly banks should set aside capital to protect against the losses on loans that turn sour in the future. The central bank wants to “achieve the same coverage of the stock and flow of NPLs over the medium term,” it said in the statement.

While banks have shown progress working through their problem loans, their aggregate level “remains far too high compared to international standards,” the ECB said. “Further efforts are necessary to ensure that the NPL issue in the euro area is adequately addressed.”

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