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

Giving euro zone banks exceptional leeway in recognising soured loans may be a mistake that could slow the bloc’s recovery from a recession induced by the COVID-19 pandemic, European Central Bank supervisor Andrea Enria said on Tuesday.

Faced with the aftermath of a deep downturn, European officials want to exempt banks from provisioning rules on non-performing loans (NPLs) backed by pandemic-related public guarantees for the first seven years, giving them relief just when bad loans are likely to rise.

“I am not at all convinced that postponing calendar provisioning rules now, with the recovery just beginning, is the right choice,” Enria said in a speech.

“Postponing or watering down these rules would mean accepting that the EU banking sector may remain clogged with pandemic-related secured NPLs for longer than a decade, leaving it unprepared to face the next recession.”

The ECB has already warned that banks are not preparing adequately for the deluge of soured loans and some lenders are releasing provisions, even though the full impact of the crisis may not be clear for years.

Instead of giving clients more time to make payment, banks should discuss restructuring to protect customers from over-indebtedness, Enria said.

“Reducing NPLs is associated with faster economic growth, higher corporate investment and lower unemployment,” he said, adding that other countries, including the United States, follow shorter timeframes to fully write off impaired loans.

Banks in Europe sat on nearly $1 trillion of bad loans after the bloc’s debt crisis and it took persistent pressure from the ECB to get much of that resolved.

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