The ECB will launch a public consultation on new guidelines that will force banks across the eurozone to set aside more cash to cover bad loans.
Under the draft addendum, banks will be given two years to reserve enough money to cover 100% of their nonperforming unsecured debt and seven years to cover all their secured bad debt. The new guidelines will only be applicable to loans classified as nonperforming after Jan. 1, 2018.
"The backstop should not [...] be seen as a best practice timetable for provisioning, but rather as a supervisory tool for addressing outliers to ensure that banks are not building up aged [nonperforming exposures] with insufficient provision coverage," the ECB said.
The regulator stressed that while the new guidelines are nonbinding, banks will be expected to provide an explanation regarding any deviations and should report on the compliance with the guidelines at least once a year.
As for addressing banks' existing NPL stocks, the ECB said it required lenders with high levels of bad loans to submit strategies aimed at reducing them in the first half of 2017. The ECB noted that while many banks have made "notable progress" and submitted "credible strategies" to reduce their bad loans, some of them "still need to improve."
The consultation will commence Nov. 30 and will run until Dec. 8, the ECB noted.
By the end of the first quarter of 2018, the ECB will present a set of additional policies to address banks' existing NPL stocks, including appropriate transitional arrangements.