EU adopts plan to tackle bad loans, could push up capital buffers

European Union finance ministers on Tuesday called for speedier unloading of bad debt by EU banks and recommended more money be put aside by the banks to protect them from trouble.

The decade-long financial crisis left European banks holding nearly 1 trillion euros of non-performing loans (NPLs), reducing their ability to lend and slowing down Europe’s economic recovery.

The amount of NPLs has slightly decreased over the last months, but at too a slow pace, European Commission Vice-President Valdis Dombrovskis told a news conference after the finance ministers agreed a new plan to tackle the problem.

“We need to accelerate our actions”, he said, welcoming the ministers’ plan.

EU states asked the Commission, which is responsible for proposing legislative changes at EU level, to consider tweaks to banking rules that would increase supervisors’ powers and force lenders to raise capital buffers against the risk that loans could turn sour.

Dombrovskis said the strategy will include giving bank supervisors more powers to “actively encourage banks to address the problem”.

Under the plan, the European Central Bank could force banks to increase their buffers against existing NPLs when it deems they are not sufficient.

Banks could also be obliged to automatically set aside more capital for new loans when they expect the level of NPLs to grow beyond acceptable levels.

Banks warned against measures that could be excessive and unduly increase costs.

“Supervisors already have wide-ranging powers to address perceived deficiencies in the banks they supervise,” AFME, a financial lobbying group, said in a statement, arguing that there is no evidence supervisory powers need to be increased.

BAD LOAN PRICES

Ministers also proposed measures to improve secondary markets for NPLs, which are currently underdeveloped and provide little incentive for banks to unload their bad credit.

Just 80 billion euros of NPLs were sold last year.

Ministers hope that a better-functioning market would push up the price of NPLs, which are currently sold at small percentages of their nominal values, creating huge holes in the balance sheets of banks which offload them.

An earlier plan to set up an EU “bad bank” that could have absorbed big chunks of bad debt at higher prices was dropped, in part because EU states with healthier banks, like Germany, are not keen to use taxpayers’ money to help lenders in the mostly southern European countries where the bad loan problem is worst.

But ministers agreed on Tuesday a more prudent blueprint to set up national “asset management companies” (AMCs) that could help develop the market for bad loans.

Asset management companies set up in Spain and Ireland during the 2008-2012 financial crisis bought bad loans from banks at around 50 percent of their nominal value.

This would be a higher price than the market is ready to pay in Italy, the EU country with the highest level of NPLs in absolute terms, where UniCredit, the country’s biggest bank, has sold this year 17.7 billion euros of bad loans at average 13 percent of their gross nominal value.

But EU officials said the price of bad loans depends on national conditions and recovery time and can vary widely among countries. The commission will set by the end of the year “asset valuation rules” for AMCs.

AMCs could also be turned into national bad banks that acquire bad loans at prices much closer to their nominal value. But this would constitute state aid and would entail strict conditions, the restructuring of the banks that offloaded the bad loans and losses for banks’ shareholders and junior bondholders, EU officials said.

Ministers also pushed for changes to national insolvency regimes that would speed up the recovery of bad loans from debtors.