Banks in the EU will need to set aside more funds to cover the risk of new loans turning bad, according to new rules proposed by the bloc's executive arm.
As part of its plan to tackle Europe's large bad loan pile, the European Commission said banks would be subject to a minimum coverage level for newly originated loans that become nonperforming. If they are not able to meet this level, they will face deductions from their own funds.
The proposals, announced March 14, also aim to allow banks to recover value from secured loans more easily, and to establish stronger secondary markets for nonperforming loans. Bad loans in the EU, many of which accumulated during the global financial crisis, remain "well above" pre-crisis levels at €910 billion, the EC said, adding that, although provisioning has increased recently, loss recognition is still too slow.
The proposals will require banks to fully provision for unsecured nonperforming loans after a period of two years, and for secured NPLs after eight years. They follow a delay in similar proposals put forward by the ECB, the regulator of the eurozone's biggest banks, in 2017.
An EC directive will give certain secured creditors the ability to seize the collateral underpinning a loan without going to court. This out-of-court enforcement will be limited to loans granted to businesses and will exclude consumer loans, and will only apply when the business in question has agreed to it.
The same directive will remove barriers to credit servicing and to the transfer of loans to third-parties around the EU, which will help develop secondary markets for NPLs. Among other things, the proposal defines the activities of credit servicers and sets common standards across the EU.
Meanwhile, the EC is providing technical guidance for countries looking to set up "bad banks" to deal with NPLs. A blueprint for such national asset management companies will clarify permissible designs and state aid conditions.
Several EU countries including Italy and Greece are still dealing with the legacy of crisis-era bad loans. NPL ratios vary significantly between states and range from 0.7% to 46.7%, the EC said. Slow progress in some countries remains "a source of concern," it said.
Nevertheless, it said NPL ratios are generally falling, and that the quality of banks' loan portfolios is improving. Across the bloc, the NPL ratio fell to 4.4% in the third quarter of 2017, down by roughly 1 percentage point year over year to its lowest level since the fourth quarter of 2014.
