Exclusive: ECB to guide banks on working off bad debt before setting targets - sources

Thu Jun 23, 2016 7:36am EDT
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By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank is planning to give euro zone banks non-binding guidance by the end of 2016 or early 2017 to cut their bad debt pile, raising the heat on lenders but not forcing their hand, sources said.

The ECB, which supervises 129 of the biggest banks in the euro zone, will eventually set confidential quantitative and qualitative targets but not all will necessarily come in writing, the sources told Reuters.

This would give banks some flexibility and suggests that the ECB will at least initially rely heavily on persuasion.

Weighed down by around 900 billion euros ($1 trillion) of bad debt, banks have delayed fixing this legacy of Europe's debt crisis, worried that write-offs would lead to losses, limiting dividends and also executive pay.

Regulators are keen to give banks a push, however, as a huge stock of bad loans depresses bank valuation, increases funding costs and ultimately holds back economic growth, countering the very stimulus the ECB's monetary policy arm is trying to provide.

Indeed, the ECB estimates 7.1 percent of euro zone bank loans were not performing at the end of last year, nearly five times the level in the United States. Italy and Greece are among the top laggards.

The focus on tailor-made non-binding guidance in the ECB's first exercise focused on bad debt suggests that the supervisor will avoid any heavy handed steps, easing concerns that banks would have to quickly sell off bad debt but potentially prolonging Europe's bad debt epidemic.

Another source added that no decision has been made so the ECB's thinking could still evolve, particularly regarding the timeline. The ECB declined to comment for this article.   Continued...

The headquarters of the European Central Bank (ECB) is illuminated with a giant euro sign at the start of the "Luminale, light and building" event in Frankfurt, Germany, March 12, 2016.     REUTERS/Kai Pfaffenbach/File Photo