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Banks ordered to bring in ‘ambitious’ bad loan plans

The European Central Bank (ECB) has said it expects banks with high levels of unpaid loans to submit “ambitious and realistic” plans to bring them down, as it published guidelines on non-performing loans (NPLs).

The project to address high levels of NPLs is being spearheaded by the deputy governor of the Irish Central Bank, Sharon Donnery.

The guidelines published yesterday stopped short of forcing banks to meet specific targets to reduce their stocks of bad loans, or hard timetables for action.

They will mean banks have to provide more detail to regulators about their stocks of loans.

“Plans should be ambitious and realistic,” the eurozone’s top bank supervisor said on its website after seeking industry feedback on the guidelines.

“Regarding enhanced disclosures on NPLs, to ensure consistency and comparability the guidance should be implemented from the 2018 reference dates onwards.”

European Union banks are sitting on bad loans totalling €1 trillion.

Irish banks continue to have some of the highest levels of problem debts in the euro area, despite more than €124bn of debts being taken into Nama or disposed of by lenders since the crash.

In absolute terms, more than a quarter of all EU bad loans are held by Italian banks, with Banca Monte dei Paschi di Siena, which is negotiating the terms of a multibillion-euro bailout with EU regulators, holding the largest proportion of bad loans compared to its capital.

German banks hold just 2.6pc of bad loans in the Euro area.

The bulk of Europe’s bad loans are a result of the crash and decade-long slump that followed. But the danger bad loans pose to the financial system may be about to worsen – if loose money policies that have kept debt cheap for borrowers start to be reversed.

Last week, Reuters reported internal EU documents that raised fears at the regulator that the risks posed by NPLs to the whole EU banking system may increase, “should monetary conditions become less accommodative,” a document accompanying the report said. The ECB is scheduled to cut the pace of the bond purchases, which it has used to try to stimulate economic growth, by a quarter to €60bn a month from April.

The purchases are due to be phased out by the end of the year, and after that, interest rate increases could be on the cards if the economy performs.

The NPL situation is due to be discussed at a meeting of EU finance ministers in Malta on April 7-8 on how to tackle the issue. A more detailed version is expected in spring.
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