With an eye on reducing risks in the banking sector by forcing financial institutions to set aside more money against new loans from turning bad and favouring the rapid offloading of their existing stocks of bad debt, the European Commission on Wednesday presented its newmeasures aimed at tackling Non-Performing Loans (NPLs).
Wednesday’s proposals by Vice-President Valdis Dombrovskis are part of a package that the EU Commission has put forward in recent months to help banks raise lenders’ capital requirements, set new loss-absorbing buffers, and facilitate the orderly liquidation of failing banks.
According to the Commission, reducing banks’ exposure to so-called NPLs, as the European Central Bank describes loans that have seen no interest payment for more than 90 days, could mean that the EU Member States would be able to set up an “ EU bad bank” in order to spread risk across the bloc, rather than holding it at the national level.
The Commission also published non-binding guidelines to set up bad banks or asset management companies that would buy the loans and allow lenders to focus on core lending activities.
“As the EU and its economy regain strength, Europe must seize the momentum and accelerate the reduction of non-performing loans,” Dombrovskis said in a statement. “This is essential to further reduce risks in the European banking sector and strengthen its resilience.”
The Commission also proposed measures to facilitate the offloading of the existing stock of bad loans. The Member States could then agree with corporate borrowers on an accelerated out-of-court mechanism to recover the collateral in case the loans turn toxic and avoid the current lengthy judicial procedures that slow recovery in EU banks.
The proposed measures by the Commission, however, avoid introducing new provisioning requirements for existing bad loans. This is done in order to avoid forced fire-sales of bad debt by banks, which leave large gaps in the banks’ balance sheets.
The banks will now have two years to fully cover potential losses from the new loans that are not backed by a collateral.