The European Central Bank is planning to give eurozone banks non-binding guidance by the end of 2016 or early 2017 to cut their bad debt pile, raising the heat on lenders but not forcing their hand, sources said.
The ECB, which supervises 129 of the biggest banks in the eurozone, will eventually set confidential quantitative and qualitative targets but not all will necessarily come in writing, the sources told Reuters.
This would give banks some flexibility and suggests that the ECB will at least initially rely heavily on persuasion.
Weighed down by around €900 billion of bad debt, banks have delayed fixing this legacy of Europe’s debt crisis, worried that write-offs would lead to losses, limiting dividends and also executive pay.
Regulators are keen to give banks a push, however, as a huge stock of bad loans depresses bank valuation, increases funding costs and ultimately holds back economic growth, countering the very stimulus the ECB’s monetary policy arm is trying to provide.
Indeed, the ECB estimates 7.1 per cent of eurozone bank loans were not performing at the end of last year, nearly five times the level in the US. Italy and Greece are among the top laggards.
The focus on tailor-made non-binding guidance in the ECB’s first exercise focused on bad debt suggests that the supervisor will avoid any heavy-handed steps, easing concerns that banks would have to quickly sell off bad debt but potentially prolonging Europe’s bad debt epidemic.
Another source added that no decision has been made so the ECB’s thinking could still evolve, particularly regarding the timeline. The ECB declined to comment for this article.
The sources said that banks not complying could see the guidance firmed up in a regular regulatory review, possibly feeding into their capital requirements.
Italy’s UniCredit has nearly €80 billion of non-performing loans, 15 per cent of its loan book, while Intesa Sanpaolo had €33 billion at the end of the first quarter. Greek banks are meanwhile sitting on around a €100 billion of bad debt.
Analysts warned that a rapid sale or write down would require many banks to raise capital since provision levels are just over 40 per cent on average and current market pricing of such debt would result in losses.
The ECB will ask banks to set up processes to deal with bad loans with executive or board level oversight, and the new rules will treat differently bad loans on the books for years than recently soured debt. The supervisor will also ask how many loans banks have reclassified, for example from being performing to non-performing, and on how many they have taken action to recover the money.