‘It is right time’ to tackle bad loan woes, ECB’s Nouy tells EU ministers

BRUSSELS (Reuters) – The European Central Bank intends to move ahead with its plan to force banks to set aside more money against future bad loans, the bank’s top supervisor was quoted as telling euro zone finance ministers on Monday.

The comment, reported by a European Union official, confirms earlier statements by top ECB policy makers defending draft guidelines that give euro zone banks seven years from January to provide for credit backed by collateral and two years for unsecured debt.

Daniele Nouy, chair of the Supervisory Board at the ECB, told euro zone finance ministers in a meeting in Brussels that it was “the right time” to proceed with the more stringent measures, in order to avoid a new build-up of non-performing loans (NPLs) by euro zone lenders, the EU official said.

The bloc’s banks accumulated 1 trillion euros ($1.1 trillion) of bad loans during the decade-long financial and economic crisis, and the number has only recently decreased to nearly 800 billion euros.

The mass of bad loans has affected banks’ ability to provide credit to firms and households, slowing down the bloc’s economic recovery.

Italy, the euro zone country most affected by the problem, has opposed the new ECB move, fearing it could weaken some of the country’s banks.

However, the main regulatory risk for lenders saddled with bad loans would come from ECB’s stricter directives to reduce the existing stock of NPLs, as it could force fire sales of assets leaving big holes in banks’ balance sheets.

But this risk seems to have been receded as the ECB is unlikely to present tough guidelines on the reduction of the bad loan stock.

New measures, expected by March, will be different from the planned guidelines on new bad loans, and are expected to focus only on the banks with acute problems, rather than on the whole sector.

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