Exclusive: EU warns banks could face increased bad debt risk as ECB tightens


BRUSSELS (Reuters) – European Union banks could face growing risk of bad loans totaling € 1,000 billion ($ 1.1 trillion) when the European Central Bank cuts its economic stimulus program, according to internal EU documents viewed by Reuters.

The famous euro symbol is pictured outside the former headquarters of the European Central Bank (ECB) in Frankfurt, Germany on July 17, 2015. REUTERS / Kai Pfaffenbach

Banks faced more so-called non-performing loans (NPLs) in the wake of the 2008 global financial crisis, as businesses and households struggled to pay off debts. This in turn reduced their ability to make new loans.

While the problem is more acute in countries like Greece and Italy, which have experienced protracted economic crises, it has “a European dimension” with possible fallout, according to a report from representatives of EU countries and regulators.

And the risks posed by NPLs to the entire EU banking system could increase, “if monetary conditions become less accommodative,” says a document accompanying the report.

The ECB is expected to cut the pace of its bond purchases, which it has used in an attempt to stimulate economic growth, by a quarter to 60 billion euros per month from April.

While maintaining them at least until the end of the year, it is also paving the way for a phase-out of its aggressive stimulus measures, sources said.

The EU countries with the highest bad debt rates have returned to growth since the ECB launched its stimulus package in 2014, but it’s still unclear what will happen when that ends.

If banks are likely to benefit from higher interest rates, which improve the margin they make on their loans, this may be offset by the effects of another economic downturn.

The report will be discussed at a meeting of EU finance ministers in Malta on April 7-8 on how to tackle the NPL issue and a more detailed version is expected in the spring.


Germany, the EU’s largest economy, has so far opposed EU-funded solutions to the problem, arguing that it is only a problem in some countries and that it is up to them to resolve it.

In absolute terms, more than a quarter of all bad debts in the EU are held by Italian banks, with Banca Monte dei Paschi di Siena BMPS.MI, which is negotiating the terms of a multibillion-euro bailout with EU regulators, holding the largest proportion of bad debts to its capital.

German banks hold only 2.6% of loans classified as sour, while in Greece and Cyprus almost half of all loans are difficult to collect, according to the latest data from the European Banking Authority (EBA ).

Greek banks are urged to reduce their high bad debt load, a source said on Wednesday.

In Portugal, nonperforming loans represent almost 20% of the total, and in Slovenia and Italy, the ratio is above 16%, against a European average down slightly of 5.4%.

To tackle the problem, EBA proposed in January the creation of a bad publicly funded bank that would get sour loans at prices higher than what the market is now willing to pay.

This could help create a secondary market for loans, which banks are now reluctant to sell because prices are too low and there are too few buyers.

While UniCredit CRDI.MI, Italy’s largest bank, sold 17.7 billion euros of bad loans at an average of 13% of their gross face value this year, it also raised 13 billion euros in the markets to offset the miss to win.

Italian lenders assess bad loans at 41% of their face value on average, but credit quality varies and few could afford a UniCredit scale capital raise.

While Germany has not approved the EBA plan, EU documents indicate that developing a secondary market for NPLs is a priority.

But this issue remains controversial and will likely require compromise at a political rather than a technical level at the Malta meeting, an EU official familiar with the talks told Reuters.

The documents also suggest broader “banking sector restructuring” as governments tackle the problem of non-performing loans. This could lead to mergers between EU banks after they offload their bad debts, a banking industry official said.

“Time limits” for concluding insolvency proceedings are also suggested as a way to increase the value of bad debts, as their collection would become easier and cheaper. This proposal would complement the European Commission’s plans to shorten bankruptcy proceedings and the recovery of bad debts.

Additional reporting by Silvia Aloisi and Valentina Za in Milan; Editing by Alexander Smith


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