Giving banks too much time to deal with bad loans a mistake: ECB

Reuters, FRANKFURT, July 6 – Giving euro zone banks special freedom in recognizing sour loans could be a mistake that slows the bloc’s recovery from the COVID-19 pandemic, according to European Central Bank supervisor Andrea Enria. Faced with the aftermath of a profound downturn, European officials seek to remove banks for the first seven years from provisioning restrictions for non-performing loans (NPLs) backed by pandemic-related governmental guarantees, offering them relief just as bad loans are expected to surge. In a speech, Enria remarked, “I am not at all confident that deferring calendar provisioning rules now, with the recovery just getting started, is the proper choice.” “Delaying or weakening these requirements would imply accepting that the EU banking industry might be jammed with pandemic-related secured NPLs for more than a decade, leaving it unprepared for the next recession.” Even though the full impact of the crisis may not be obvious for years, the ECB has already cautioned that banks are not fully preparing for the avalanche of soured loans, and some lenders are releasing provisions. Rather than offering customers additional time to pay, banks should consider restructuring to shield customers from over-indebtedness, according to Enria. “Reducing NPLs is linked to faster economic development, stronger business investment, and reduced unemployment,” he said, adding that other nations, like the US, use shorter timelines to entirely write off bad loans. Following Europe’s financial crisis, banks held about $1 trillion in bad loans, and it required the ECB’s constant push to get much of that resolved. Balazs Koranyi contributed reporting, and Timothy Heritage edited the piece. The Thomson Reuters Trust Principles are our standards./nRead More