The ECB said there will be a public consultation on the planned rule change next month © Bloomberg

The European Central Bank has launched a fresh push to force banks to tackle losses from loans that have gone sour, in an effort to stamp out one of the biggest problems in the region’s financial system.

A rule change put forward by the ECB will force banks to post collateral against all of any loan that becomes non-performing, making it more expensive for lenders to hold a stock of bad debt. Higher collateral requirements raise the cost of funding for lenders and remove a potential source of revenue.

The rules would only apply to loans declared non-performing — where borrowers had missed several repayments — after January 2018, and not to the large stock of non-performing loans that are a legacy of the region’s financial and economic troubles.

But the ECB signalled that it could still issue tougher rules on tackling the stock of sour loans, saying that by the end of March it would present fresh policies to deal with NPLs left over from the crisis years.


Amount of non-performing loans at the end of the first quarter

“This is the ECB saying the banks they supervise haven’t done enough to deal with their non-performing loans. The provisions are not a panacea for existing NPLs but do provide defined measures to prevent new NPLs from adding to the existing sizeable stock,” said Michael Huertas, a lawyer at Baker McKenzie’s Frankfurt office. “In practical terms, what this development does do is accelerate the time pressure for NPLs to be worked out.”

A public consultation will be held on the planned rule change next month, the ECB said on Wednesday.

The ECB’s supervisory wing, the Single Supervisory Mechanism, has come under fire for failing to tackle the problem of non-performing loans more quickly, especially in weaker economies such as Italy, Greece and Cyprus. At the end of the first quarter of this year €865bn of loans were non-performing — almost 6 per cent of all lending.

Most are a legacy of the region’s economic crisis and have hampered banks’ ability to put that period behind them and seek new lending opportunities.

At the moment banks are required only to provision prudently against old loans that have gone sour, with no specific guidelines on timing or the degree of coverage. Some banks meet the proposed requirement of 100 per cent coverage for their existing loans but many fall short.

Under the planned new rule banks will have two years to set aside collateral against any unsecured part of an NPL.

James Chappell, analyst at Berenberg, a German investment bank, said: “Europe’s banks have struggled to recover because they haven’t dealt with the fact that they have too high a debt burden. The ECB is toughening its rules and you get the feeling that the SSM doesn’t think banks are moving fast enough. But is the supervisor tough enough or fast enough? No.”

Paola Sabbione, an analyst at Deutsche Bank, said: “There has already been progress made by European banks, which should continue in the coming years. But the announcements promised for next year could lead to additional initiatives to tackle the stock of non-performing loans.”

Loans become sour once a payment becomes 90 days overdue, according to a definition by the European Banking Authority. The ECB said the draft was meant to provide “quantitative supervisory expectations for minimum levels of prudential provisions for new NPLs”.

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