Daily Management Review

ECB: We need a 'bad bank' to deal with 'bad loans'


02/03/2017


Vice-President of the European Central Bank (ECB) Vitor Constancio urged to create a plan of action to support banks in dealing with a backlog of bad debts of about 1 trillion euros, which appeared as a result of the financial crisis.



~ kyu via flickr
~ kyu via flickr
According to Constancio, the European operating companies are facing difficulties in the current environment. In such a situation it would be correct to create a national-level single European plan for such companies.

"This European plan should explain what can be done within the framework of a flexible approach to the existing regulation, and to encourage countries to take all necessary measures in a clearly defined time frame", - said the representative of the ECB.

European banks are now faced with a problem of non-performing debt, and dealing with this problem may take a few decades warned the Dutch audit company KPMG. According to its estimates cited Bloomberg, today volume of overdue loans in their portfolio reached € 1,2 trillion ($ 1.3 trillion).

Solving the problem of non-performing loans is complicated by slow growth of the European economy, combined with ultra-low interest rates. In addition, there are changes in banking laws, which, inter alia, stricter capital requirements and increase penalties for violation of regulatory requirements. All this adversely affects profitability of credit institutions.

Chairman of European Banking Authority (EBA) Andrea Enria said that it is necessary to create a market for the "bad" loans, which should lead to an increase in their prices. At the moment, it is difficult to sell overdue loans because of lack of proper marketing, which has led to very low prices for them, and efforts of banks to get rid of this burden.

An asset management company, acting as a "bad bank", will try to sell bad loans at their estimated "real economic cost", not according to their market price. If the European "bad bank" does not get rid of the loan for three years, it will have to accept the market price.

Head of the European Stability Mechanism Klaus Regling supported EBA’s proposal, saying that the new organization’s goal should be acquiring at least 250 billion euros in EU banks non-performing loans.
The European Union would require support of all European countries and creditors to implement such a plan. However, Germany, the largest EU economy, has long been opposed sharing risks of banks, fearing that German taxpayers would end up paying for rescue of banks in other countries.

source: ft.com






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