ECB plans tougher rules to slash bad loan risk

[FRANKFURT] The European Central Bank plans to toughen rules on how eurozone banks deal with the mountain of bad loans still burdening the sector, officials said Wednesday.

Supervisors at the ECB, which took over as top regulator in the single currency area in 2014, want lenders to set aside cash to cover loans in default two years after they are identified, at the latest.

Deadlines to make provisions for "non-performing" loans - where borrowers have not repaid anything for an extended period - could be extended to seven years for banks that have already written down part of the value of the loans in their accounts.

The eurozone's bloated stock of non-performing loans stood at 865 billion euros (S$1.384 trillion) at the end of March.

Banks managed to slash the figure from 950 billion euros at the same point in 2016.

But tackling the bad loans remains an "important step in restoring the health of the banking system necessary for a strong and healthy euro area economy," Central Bank of Ireland deputy governor Sharon Donnery told journalists in a telephone conference.

The announcement on Wednesday opens a public consultation about rules that should apply to loans identified as in default from early 2018.

"Part of our job is to prevent the further buildup of non-performing loans into the future," Ms Donnery added.

While the rules will be non-binding, lenders could still face a fine from the Frankfurt-based regulators if they are unable to offer good reasons for failing to meet them.

The ECB recently slapped its first penalties on an Irish and an Italian bank for breaching such prudential rules.

It published a first draft of new bad loan guidelines in March, hoping to encourage banks to make fewer risky loans, reduce their exposure to existing ones and improve their risk management practices.

Governments in the 19-nation eurozone and EU institutions will also have a role to play, Ms Donnery noted, including by speeding up drawn-out legal processes that often discourage banks from trying to wind down bad debt.

AFP