Europe’s Revived Idea of Bad Bank Faces German-Led Resistance

(Bloomberg) -- A push by some euro area officials to free lenders of their bad debts faces resistance from countries worried that they will bear the costs, according to people familiar with the matter.

In northern Europe, where bad loan levels are far lower than in the south, governments and regulators led by Germany don’t yet see the need for the so-called bad bank that officials elsewhere are proposing, the people said, asking to remain anonymous because the discussions are private. The idea also raises legal questions, they said.

Europe is facing its deepest recession in living memory, raising the prospect of widespread corporate defaults that would rip into the balance sheets of banks and reduce their ability to lend. To avoid that vicious circle, some officials are pushing a plan floated in 2017: a state-funded vehicle that would assume bad loans and allow banks to focus on keeping credit flowing.

Earlier, the Financial Times cited Yannis Stournaras, governor of the Bank of Greece and a member of the European Central Bank governing council, as saying in an interview that he supports such a solution. An ECB spokeswoman declined to comment on the report.

Yet many of the issues that stopped the plan from getting off the ground three years ago persist. Shifting losses from banks to taxpayers would violate European rules against bailouts and there’s also the question of distorting competition by helping weaker banks to the detriment of stronger ones, said the people familiar with the matter.

On the Hook

Beyond those questions is a bigger political problem: taxpayers in countries like Germany don’t want to be on the hook for losses at banks in countries like Italy, said the people.

The same mistrust is complicating discussions of other plans to help the hardest-hit economies avoid a debt spiral, including proposals to issue joint bonds.

Previous discussions about setting up a European bad bank were discontinued because they weren’t considered to be “constructive,” according to a spokeswoman for the the German Finance Ministry.

While the initiative has come from euro area officials, hammering out the details of any plan would fall to the European Commission, the European Union’s executive arm. Should a bad bank become necessary, the commission is open to discussing the idea, but there’s nothing on the table, an official said on condition of anonymity.

The commission isn’t currently working on a bad bank, a spokesman said, adding that it would “of course explore all relevant possibilities” if there was a need to go beyond measures already taken to help the financial industry.

Andrea Enria, the ECB’s top banking watchdog, proposed a joint state-backed entity to soak up bad loans when he was still head of the European Banking Authority in 2017. Under that plan, the “asset management company” would have taken over soured credit from banks above market prices and managed the subsequent sell-off. Yet even even proponents of the idea conceded at the time that it would be difficult to implement.

Still, European diplomats expect the debate about a bad bank to gain traction when European leaders weigh their post-crisis response and consider additional aid to help the most affected countries, such as Italy, to revive the wider economy, other people familiar with the matter said.

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