October 4, 2017 / 7:33 AM / in 18 days

ECB tells banks to set aside more cash on bad loans

FRANKFURT (Reuters) - The European Central Bank will ask euro zone banks from next year to set aside more cash to cover newly classified bad loans and may also present additional measures to tackle the sector’s huge stock of bad debt, it said on Wednesday.

The skyline, with its characteristic banking towers and the headquarters of the European Central Bank (ECB, R), are reflected in river Main in Frankfurt, Germany, ctober 1, 2017. REUTERS/Kai Pfaffenbach

Soured loans are clogging up bank balance sheets and holding back lending, a headache for the ECB as weak credit growth offsets some of the stimulus it is trying to provide through low interest rates.

Starting Jan. 1, banks will have at most two years to set aside funds to cover 100 percent of their newly classified non-performing unsecured debt and seven years to cover all secured bad debt, it said in a new proposal, confirming an earlier Reuters report.

“In addition, by the end of the first quarter of 2018, ECB Banking Supervision will present its consideration of further policies to address the existing stock of NPLs (non-performing loans), including appropriate transitional arrangements,” it said in a statement.

Banks are sitting on nearly 1 trillion euros worth of bad loans, partly a legacy of Europe’s debt crisis, with lenders in places like Italy, Greece, Spain and Cyprus suffering the most.

Their problem is that Europe is lacking an effective market for non-performing loans, so selling bad debt would result in big losses and force them to raise capital, a costly exercise given low bank valuations.

The provisions will rise gradually, in a linear manner toward 100 percent and actual provisioning in the early part of the given time frame may be higher if local regulations require bigger buffers.

If part of a loan is secured and part is unsecured, the ECB would apply a different timetable to different parts of the same facility, it said.

“Furthermore, banks are expected to explain any deviation from the guidance to supervisors,” the ECB said. “Based on the banks’ explanations the ECB will assess the need for additional supervisory measures.”

The ECB will hold a public consultation on these new proposals until Dec 8.

Reporting by Balazs Koranyi; Editing by Toby Chopra

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