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The European Central Bank has received another setback in its bid to get tough on eurozone banks’ problem loans, after a European Council opinion found that its plans to require banks to hold more cash against their non-performing exposures overstepped the bank’s mandate.

The ECB and politicians have been at odds over whether a set of proposals made by the bank earlier this year goes beyond its mandate. The central bank is keen to do more to force banks to deal with their non-performing loans, and the changes, if passed, would make it much more expensive to hold them.

The proposals require banks to hold cash against the entire unsecured part of any new non-performing loans within two years of the loan turning sour. The entirety of the loan must be fully collateralised within seven years. The measure would not apply to almost €1tn in loans that are now non-performing.

The council’s legal opinion, which is not binding, says the central bank, as the eurozone’s banking watchdog, cannot take measures “intended to ensure compliance by banks of criteria for minimum provisioning which are not, or not yet, the object of harmonization by the EU legislator,” according to a version of the document seen by Reuters.

Lawmakers, particularly those from Italy, have argued that the rules in their current form overstep the ECB’s mandate.

The ECB cannot set rules that automatically apply to all banks everywhere, but the supervisor can set requirements for individual banks on a case-by-case basis. Daniele Nouy, the eurozone’s top banking supervisor, has acknowledged that the ECB does not have so-called Pillar 1 powers that mean rules automatically to all banks.

However, the ECB believes that the proposals can be rewritten so that it is clear that they fall within the scope of the Pillar 2 powers, which allow supervisors to set rules on a case-by-case basis.

The ECB will hold a public hearing later this week. Comments can be taken on the proposed rules.

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