Stung by critics, ECB seeks to defuse bad debt disputes

FRANKFURT (Reuters) – The European Central Bank on Tuesday sought to defuse a dispute with European and Italian authorities over its plans to rid eurozone banks of bad debts, opening the door to collaboration with other institutions and adapting its approach to each bank.

FILE PHOTO: European Central Bank (ECB) President Mario Draghi holds a press conference following the Governing Council’s decision on interest rates at the ECB’s headquarters in Frankfurt, Germany, on October 26, 2017. REUTERS / Kai Pfaffenbach

The ECB has been criticized for establishing general rules on how much banks should set aside for new delinquent loans. It’s due to draft guidelines by March for existing soured credit, a much bigger problem at nearly 900 billion euros ($ 1.04 trillion).

Critics, including Italian Economy Minister Pier Carlo Padoan and Italian European Parliament President Antonio Tajani, fear the new rules will force banks to cut lending or even need new capital.

They also claim that the guidelines infringe on the prerogatives of the European Parliament and ignore countries, such as Italy, where justice is slow and economic recovery fragile.

But ECB President Mario Draghi appeared to extend an olive branch on Tuesday, calling for a “joint effort” between regulators, supervisors and national authorities.

“Currently, the most important issue here is tackling non-performing loans,” Draghi, himself Italian, told an ECB conference.

“So we need a joint effort of banks, supervisors, regulators and national authorities to deal with this problem in an orderly manner,” Draghi said.

His comments raised the chances that the ECB’s guidance on legacy loans would be influenced by a legislative proposal that the European Commission is preparing in parallel on the issue, as Reuters reported last month.

Eurogroup President Jeroen Dijsselbloem said on Monday that there was “general agreement” among euro area finance ministers on the ECB’s approach.

But Italy’s Padoan voiced his dissent, saying on Tuesday the plan went “beyond prudential limits” set for the ECB and called for a “reasonable method and timetable” that does not create “new fragility”.

ITALIAN FEARS

For Italian banks, sitting on a quarter of the eurozone’s bad loans, the main fear is that the new bad debt guidelines, which give banks seven years to provide collateral-backed loans and two years for bad loans. unsecured debts, apply to those inherited too.

Their concerns were echoed by the European Banking Federation, which said in a letter to European authorities that the new rules would put eurozone banks at a competitive disadvantage.

Speaking after Draghi, ECB chief supervisor Daniele Nouy sought to allay those fears, stressing that the legacy lending approach will be “on a case-by-case basis.”

“For legacy (NPL), well, the situation is very diverse, so it should only be a case-by-case assessment and solutions,” Nouy said at a conference. “We work with all the banks that have excessively high levels of non-performing exposures.”

Sources had told Reuters that the ECB was rethinking its approach to old non-performing loans, originally modeled on its guidelines on new bad loans, in part because of the Italian backlash.

($ 1 = 0.8651 euro)

Editing by Balazs Koranyi and Larry King

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