After much lobbying, guidelines for banks become “non-binding expectations,” says the ECB.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Banks in Europe have won yet another key regulatory battle, and once again largely at the expense of Eurozone citizens, both in their role as taxpayers and bank customers: How to deal with their bad loans.
These non-performing loans (NPLs) are a long-festering massive problem at European banks. At most recent count, the total was estimated to be €759 billion, or 5.15% of total loans. By comparison, the NPL ratios in the US and UK banking sectors in 2016 were 1.3% and 0.9%, respectively. Currently six (out of 19) Eurozone countries have an NPL ratio above 10%:
- Ireland: 12.8% (down from 15.8%)
- Italy: 11.8% (down from 16.6% in 2016)
- Portugal: 18.2% (down from 19.2% in 2016)
- Slovenia: 13.6% (down from 19.7% in 2016)
- Greece: 46.6% (no change since 2016)
- Cyprus: 34.0% (down from 49% in 2016)
After years of promising sweeping reforms to finally address the NPLs in various stages of decay on EU banks’ balance sheets, the European Commission and European Central Bank have unveiled a regulatory package with little teeth but lots of sweeteners (for the banks).
The reform package has four main goals:
- To ensure that banks set aside enough funds to cover the potential risks posed by loans going sour in the future.
- To encourage the development of secondary markets where banks can sell their NPLs to credit servicers and investors.
- To facilitate debt recovery, as a complement to the insolvency and business restructuring proposal put forward in November 2016. This is particularly important in countries like Italy where it can take years to recover unpaid debt.
- To provide Member States with a blueprint, albeit non-binding, on how to establish Asset Management Companies (AMCs) or other measures dealing with NPLs.
On the surface these reforms may sound reasonable, perhaps even laudable, but in reality they represent a retreat from an earlier proposal for more robust treatment of bad debt. For years the ECB had promised tough measures on NPLs. But last November, the European Parliament accused the ECB of overstepping its authority by planning to impose “binding rules of general scope applicable to all banks” that is supervises.
Banking lobbies and some national governments, including Italy, feared that tough regulatory measures would have a negative impact on domestic lenders, and they lobbied furiously to prevent that from happening. Judging by the latest policy announcements, they got their way.
The ECB’s long-delayed guidelines on new non-performing loans are due to go into effect on April 1, but the supervisor has already said it will hold off for several years before forcing lenders to actually build provisions for loans going bad after its cut-off date. According to the guidelines, banks will have two years to fully provision for bad non-secured debt. For secured loans the deadline will be as long as eight years.
In another deviation from its original proposal, the ECB will ask for provisions on secured debt only from the third year, instead of a linear build up. “The ECB is still shying away from moving quickly on addressing NPLs,” said Guntram Wolff of Brussels-based think tank Bruegel. “It is important to give time, but another two-and-half-year delay is bad news for returning Europe to full health.”
The ECB also said the guidelines were “non-binding expectations” and would merely serve as the basis for case-by-case dialogue with banks on how they provision against bad debt.
In sum, lenders will not be treated consistently by regulators, the guidelines are non-binding and, in any case, will not come into effect until at least 2021 just to begin getting their books in order. “Banks should use the time to prepare themselves and also to review their credit underwriting policies and criteria to reduce the production of new non-performing loans (NPLs), in particular during the current benign economic conditions,” said the ECB in a statement.
While the banks have been granted a two-and-a-half year breather on making changes, during that time they could end up getting a big helping hand from EU taxpayers. Among its guidelines on setting up bad banks or asset management companies that would buy bad loans from banks is one that effectively allows state aid to set up these entities is allowed, but under certain conditions and as “an exceptional solution.”
This policy measure sounds eerily similar to a proposal put forward last February by the ECB Vice President Vitor Constancio for the creation of a whole new class of government-backed “bad banks” to help buy some of the bad loans, which itself bore a striking resemblance to a plan presented last year by the European Banking Authority (EBA) for the creation of a massive EU-wide bad bank.
One of the biggest advantages of launching this initiative at EU-level is that it will avoid the sort of public “resistance” that would occur if it is done at a national level, said EBA president Andrea Enria. Lenders will presumably be able to price their bad loans higher than their market value — and the difference between the price investors pay for the bad debt and the price the banks end up receiving will be covered by Europe’s unsuspecting taxpayers rather than bank investors. By Don Quijones.
Even banks outside Italy have an absurdly high exposure to Italian sovereign debt. Read… Despite Years of ECB’s QE (Ending Soon), Italy’s “Doom Loop” Still Threatens Eurozone Financial System
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Seven of the 15 worst NPL ratios in the entire world are in the Eurozone:
Apparently we need a REAL revolution to gain leaders, REAL LEADERS, who represent all citizens equally and not just the Banksters, and the Politically-Connected Elites.
I keep wondering, ¨why, not yet?¨ and all I can figure is people need to be cold and wet and hungry and poor enough, to get off their collective arses and revolt.
And the genius of our so-called ¨leaders¨ is they have found the satisfaction minimum, and they honor it resolutely, that their privilege may remain intact.
I was a born prole, never meant to attain a leadership role, ever. I long for one to appear among us, and lead us to freedom from beneath our economic oppressors.
They all need to go, in Europe, in America and many other places also.
Proles are content and dumbed down. The EU/ECB will do as it sees fit with no blowback from the working tax drones.
Europe will follow Japan demographically and fiscally.
Even substantial recessions won’t change the path as zombie companies won’t be allowed to fail as it would heap even more stress onto the banks. The ECB will backstop EVERYTHING.
@Robert Wait for a savior, and wait forever. The revolution has started. A corrupt fiat money system is a destroyer. Cryptos are the attempt to replace that monetary system. Don’t waste time fighting the system, replace it.
I’m sure the billionaires and their Fed, and their War Party Of The Rich have all of our best interests at heart.
As long as the same bank managers, working at the same bank, get an unlimited “tax payer put”, that’s an invitation for more (not less) NPL. Banks this damaged (NPL>6-8%) just strangle an economy (banks over 10% NPL are simply zombies)
EU banks will be just that much more damaged during the inevitable next downturn.
Ain’t socialism grand?
Surely with all the EU countries connected as they are if the banking system in Greece goes under with their 46% npls the domino effect would start? These NPLS will just be dropped out of the system for the next 10 years even though their external auditors should be booking as a bad debt now.
DBank books a bigger loss, cancels savings plan and then increases their bonus pot by 400%… they loot the taxpayer with the connivance of politicians..
Don, a few questions:
1) I noticed in your data the general trend of NPLs is going down in all top 6 countries (Greece needs some more time to get out of the mess). This is the result of a fiscal policies, or defaulting loans with tax payer money?
2) Do you by any chance know what is the structure of these bad loans? Real estate or commercial?
How I understand what your point is: if we impose stricter loan rules with higher down payment, we will both reduce future NPLs from occurring and reduce the exposure of banks to the same…making the banking system eventually more stable. And the EU backed out on what seemed to be a reasonable policy…am I right?