The European Central Bank (ECB) will make EU banks set aside more cash to cover new additions to their massive piles of non-performing loans (NPLs), it announced today, as regulators try to stop the rot of bad loans in the European banking system.
European lenders will have two years to put in place “minimum levels of prudential provisions” for new unsecured NPLs, starting from 1 January, or else will have to explain to supervisors why they have not covered the holes left by bad loans, the ECB said in a draft addendum to its NPL guidance.
Banks will have seven years to cover secured NPLs, those backed by an asset such as a house, if the draft is adopted following a consultation over the coming months.
In March the ECB published its guidelines on NPLs as it attempts to tackle one of the biggest issues still hanging over the European banking sector from the financial crisis.
Data from the ECB shows a pile of old loans, not covered by the new draft guidance, of nearly €1 trillion, with bad loan ratios still above 10 per cent in six EU states.
During the Eurozone debt crisis banks across the bloc, but particularly in Portugal, Italy, Greece and Spain, found their loan books were overextended, with borrowers unable to make payments on their loans as unemployment rose sharply and economic activity contracted. Loans become technically non-performing if the required payments have not been made for at least 90 days.
The ECB is keen for banks to be take a consistent approach to writing off the bad loans, so they can more quickly put issues behind them and lend more to the economy.
Banks with big books of bad loans have been required to submit their strategies for reducing the piles to the central bank, but the ECB noted that “some banks still need to improve”.
The ECB said it will announce whether additional measures are needed to tackle NPLs by the end of the first quarter of 2018.