European Union (EU) flags are seen outside the
EU Commission headquarters in Brussels, Belgium. File photo:
REUTERS/FRANCOIS LENOIR
EU diplomats agreed on Wednesday to soften draft rules on the money
banks should set aside to cover potential losses on new loans, in a move
aimed at helping countries such as Italy that have huge piles of bad
debt.
A decade on from the 2008 financial crisis, bad loans are still curbing many eurozone banks’ ability to lend and so support economic growth.
Their shares have dropped more than 20% in 2018 amid signs the global economy is cooling, with Italian banks down more than 25% as a Eurosceptic government took office in Rome in June.
The deal agreed on Wednesday unexpectedly softens legislative changes proposed in March by the executive European Commission, but it still needs approval of the EU parliament.
Under the proposal outlined in an EU statement, banks will have more time to set aside money to cover potential losses from new loans. States backed extending to three years, from two, the time that banks have to build a backstop that would cover new unsecured, riskier loans that go bad.
For loans secured by collateral, they agreed a new coverage schedule that is stricter in some parts, and softer in others, than the commission’s proposal.
But, crucially, states agreed to postpone the application of the new requirements. They were initially planned to be applicable from March 2018 for all loans, meaning for instance that banks would have had up to March 2020 to fully cover losses from unsecured debt.
EU governments agreed instead that only loans issued after the rules are adopted will be subject to the new requirements, effectively giving banks more than three years to cover losses from unsecured, riskier loans.
The entry into force of the new rules will depend on when a deal on the proposal is reached with EU legislators.
Nonperforming loans secured by immovable property will need to be fully covered in nine years instead of eight.
Italy victory
The changes are a major diplomatic success for Italy, which has long called for banks to be given more time to build buffers against bad loans, fearing too short a timescale could cause problems for many of its lenders.
Nonperforming loans make up an average of just 3.6% of total lending at EU banks. But in Greece they account for nearly half of loans and in Italy, the eurozone’s third-largest economy, almost 10%.
A slowdown of economic growth in the bloc could increase the ratio of soured loans as firms and households struggle to pay back debts.
Heeding the Italian and Greek concerns, EU states agreed the last-minute changes to give banks more time, in spite of calls from the European Central Bank to set stricter targets. The plan also confirms that banks will not be subject to new general requirements to cover the stock of existing bad loans.
Despite a gradual reduction, eurozone banks still hold €731bn of debt they might not be able to recover, according to the European Banking Authority’s latest available data.
In a concession to states such as Germany that wanted stricter rules, banks will have seven years, instead of eight, to build a backstop that will fully cover new bad loans secured by movable collateral.
Loopholes that would have allowed lenders to set aside less money for some loans have also been eliminated, a diplomat said.
Assets of banks that do not build a sufficient backstop will automatically be devalued under the proposed rules.
Reuters
A decade on from the 2008 financial crisis, bad loans are still curbing many eurozone banks’ ability to lend and so support economic growth.
Their shares have dropped more than 20% in 2018 amid signs the global economy is cooling, with Italian banks down more than 25% as a Eurosceptic government took office in Rome in June.
The deal agreed on Wednesday unexpectedly softens legislative changes proposed in March by the executive European Commission, but it still needs approval of the EU parliament.
Under the proposal outlined in an EU statement, banks will have more time to set aside money to cover potential losses from new loans. States backed extending to three years, from two, the time that banks have to build a backstop that would cover new unsecured, riskier loans that go bad.
For loans secured by collateral, they agreed a new coverage schedule that is stricter in some parts, and softer in others, than the commission’s proposal.
But, crucially, states agreed to postpone the application of the new requirements. They were initially planned to be applicable from March 2018 for all loans, meaning for instance that banks would have had up to March 2020 to fully cover losses from unsecured debt.
EU governments agreed instead that only loans issued after the rules are adopted will be subject to the new requirements, effectively giving banks more than three years to cover losses from unsecured, riskier loans.
The entry into force of the new rules will depend on when a deal on the proposal is reached with EU legislators.
Nonperforming loans secured by immovable property will need to be fully covered in nine years instead of eight.
Italy victory
The changes are a major diplomatic success for Italy, which has long called for banks to be given more time to build buffers against bad loans, fearing too short a timescale could cause problems for many of its lenders.
Nonperforming loans make up an average of just 3.6% of total lending at EU banks. But in Greece they account for nearly half of loans and in Italy, the eurozone’s third-largest economy, almost 10%.
A slowdown of economic growth in the bloc could increase the ratio of soured loans as firms and households struggle to pay back debts.
Heeding the Italian and Greek concerns, EU states agreed the last-minute changes to give banks more time, in spite of calls from the European Central Bank to set stricter targets. The plan also confirms that banks will not be subject to new general requirements to cover the stock of existing bad loans.
Despite a gradual reduction, eurozone banks still hold €731bn of debt they might not be able to recover, according to the European Banking Authority’s latest available data.
In a concession to states such as Germany that wanted stricter rules, banks will have seven years, instead of eight, to build a backstop that will fully cover new bad loans secured by movable collateral.
Loopholes that would have allowed lenders to set aside less money for some loans have also been eliminated, a diplomat said.
Assets of banks that do not build a sufficient backstop will automatically be devalued under the proposed rules.
Reuters
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