The ECB pushes the bad bank of the euro zone to clean up the degraded loans


European Central Bank officials held high-level talks with their counterparts in Brussels on the creation of a eurozone bad bank to remove billions of euros of toxic debt from lenders’ balance sheets.

The 2008 financial crisis residual debt management plan is being pushed by senior ECB officials, who fear the coronavirus pandemic could trigger a further increase in non-performing loans (NPLs) that could stall lending capacity banks at a critical time.

But the idea is met with stiff opposition within the European Commission, where officials are reluctant to waive EU rules requiring state aid to banks to be provided only after a resolution process. imposes losses on their shareholders and bondholders.

“The lesson to be learned from the crisis is that only a bad bank can get rid of bad debt quickly,” Yannis Stournaras, Governor of the Bank of Greece and member of the ECB’s board of governors, told the Financial Times. “It can be European or national. But it must happen quickly. “

The Republic’s bad bank, Nama (National Asset Management Agency), was formed in 2009 at the height of the financial crisis to remove € 74 billion in sour commercial real estate loans from banks’ balance sheets here.

Around 95% of the consideration was in the form of senior bonds, the last of which were repaid in 2017, with the remaining 1.6 billion euros of junior bonds having been repaid this year. The agency is expected to hand over the first 2 billion euros of an expected surplus of 4 billion euros to the Treasury later this year.

Greek banks have by far the highest level of bad loans on their balance sheets of any eurozone country, accounting for 35% of their total loan portfolios – a legacy of the 2010-15 debt crisis that drove the country on the verge of exiting the euro zone.

They have reduced their bad loans by around 40% in four years, under heavy pressure from the ECB. But plans by Greece’s Big Four lenders to sell more than € 32 billion in NPLs – nearly half of the country’s total – are likely to be disrupted by the coronavirus crisis, and Mr Stournaras said the best way to quickly correct their balance sheets now is through a bad bank.

ECB officials also held talks with the department of the Committee on Financial Stability and Capital Markets.

Senior EU officials rejected the idea, arguing that there are better ways to tackle toxic loans, but declined to give more details.

The high-level talks were in their infancy and had been premature, said people with first-hand knowledge. “We put an end to it on the EU side,” said a person briefed on the talks. “Nothing moves”

However, those who followed the discussions in the committee did not rule out their resumption at a later stage of the pandemic.

Andrea Enria, chairman of the ECB’s supervisory board, proposed the idea of ​​a European bad bank in early 2017 while he was still head of the European Banking Authority. His idea was blocked by officials in Brussels citing state aid rules – but he is now trying to revive the plan, people briefed on the matter have said. The ECB declined to comment.

Total non-performing loans at the euro area’s 121 largest banks almost halved in four years to € 506 billion, or 3.2% of their loan portfolios, at the end of last year . But Greek, Cypriot, Portuguese and Italian banks still have NPL ratios above 6%.

In Ireland, banks lowering their NPL levels from a peak of € 80 billion, or 32% of all loans, in 2013, to around 3% thanks to the restructuring of problem loans in Ireland. an economy in recovery and Sales.

In March, the committee adopted a temporary relaxation of state aid rules and has since spent billions of euros in emergency government aid measures.

Brussels is also finalizing plans alongside member states to allow countries to inject capital directly into struggling companies, although in return they are not allowed to pay dividends or bonuses when they receive state aid.

Proponents of the bad bank idea hope to make it acceptable under state aid rules by proposing that toxic loans should be sold in the market after a set period of time, with the power to reclaim them. losses from the lenders themselves.

Spain, Ireland and Germany all set up state-backed bad banks after the 2008 financial crisis to deal with the sudden increase in toxic bank debt.

But since then, the EU has introduced the Bank Recovery and Resolution Directive, which prohibits governments from setting up failed banks except as part of a formal resolution process. – Copyright The Financial Times Limited 2020

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