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Europe needs bank consolidation, greater transparency to cut NPLs, says SRB boss

Europe's lingering nonperforming loan issue can be resolved only if the banking industry addresses inefficiency and the overcrowding in the sector, Elke König, the chair of the EU's Single Resolution Board, told the annual conference of the Association of German Banks on April 6.

Some European markets have to ask themselves whether all of their banks are viable, and if they are not, what steps they should take.

"When we talk about NPLs, this is not an issue for all banks or all countries, and not for all banks in a given country. I think it is an issue that needs to be addressed ... by the banks themselves," König told a panel discussion.

Banks needed to ensure better disclosure of data on loan books and improve the efficiency of the insolvency system, she said. "There needs to be a push from the supervisors, for example the European Banking Authority, for minimum transparency requirements on banks' loan books."

König said, however, that European banks are "far safer than they have been for a long time.

"A lot has happened since the financial crisis in [the improvement of] the quality and amount of capital."

Eurogroup to work on NPL blueprint

Valdis Dombrovskis, the European commissioner for financial services, said in the same panel discussion that the EU was looking at setting up a blueprint for national asset management companies and national bad banks. It also wanted to facilitate secondary markets for NPLs that would require harmonizing information requirements and national insolvency law enforcement frameworks.

Dombrovskis said authorities will take into account state aid regulations to make sure the cost for the NPL resolution does not fall entirely on taxpayers.

The Eurogroup of EU finance ministers discussed the EU's NPL problem at its meeting in Malta on April 7.

The EBA identified NPLs and low profitability as important challenges for EU banks in its latest Risk Dashboard report, published April 3. The summary of risk indicators for the fourth quarter of 2016 showed an improvement in both the NPL ratio and the coverage ratio of NPLs, which stood at 5.1% and 44.6%, respectively.

The NPL ratio was 30 basis points lower than in the third quarter of 2016, while the coverage ratio for EU banks saw a 30-basis-point increase compared to the previous quarter. Despite the improvement in the indicators, there is still wide disparity between the member states with NPL ratios ranging from 1% to 46% and a coverage ratio span between 29% and around 66%.

German criticism of ECB monetary policy

Speaking at the German conference, Bundesbank President Jens Weidmann again called for a more expansionary monetary policy by the European Central Bank, warning that the continuing low interest rate environment is putting at risk the profitability of small and medium-sized banks.

In an interview with Die Zeit later that day, Weidmann said he was concerned that the boundary between monetary policy and fiscal policy is in danger of becoming blurred.

"This is especially true if we make targeted purchases of government bonds from countries that have lost the confidence of the capital markets. In doing so, we are mutualizing sovereign liability risks via the central bank's balance sheet," he said.

Weidmann as well as ECB executive board member Sabine Lautenschläger have both previously suggested the ECB should consider a change in monetary policy as soon as possible.

Despite German opposition, ECB President Mario Draghi, Vice President Vitor Constancio and chief economist Peter Praet have stated the bank will continue quantitative easing and keep interest rates low for the foreseeable future, Reuters reported April 6.