From January 2018, the European Central Bank (ECB) will demand from Eurozone lenders to set aside 100% of the value of their non-performing loans, up from 45% set aside today.
This is the conclusion of an ECB paper seen by Reuters that is expected to be published on Wednesday.
Italian banks hold a portfolio of €263bn of non-performing loans (NPLs); Greek lenders have a portfolio of €101.8bn in non-performing loans. Across the Eurozone, there is a stock of over €1trillion in NPLs. Without an established market for NPLs, banks are often forced to sell their portfolio at a big discount, reducing their overall valuation.
The ECB is planning to enforce the new rule retrospectively. Initially, new buffers will not be obligatory, but banks will be forced to account for any deviation from the standard. The policy will be obligatory for newly contracted loans, creating a more austere credit environment.
The policy shift comes as the European Central Bank plans to unwind its quantitative easing policy as soon as inflation approximates the 2% target.