The ECB expects banks to take no more than two years tofully provision for unsecured bad loans formed after April 1, 2018, and amaximum of seven years for secured loans that go sour after the same date,according to Sharon Donnery, the chairwoman of the central bank's nonperformingloans reform team.
As it looks to tackle Europe's large bad loan pile, thecentral bank also said the deadlines for banks to fully provision against new NPLsare April 1, 2021, for unsecured debt and April 1, 2025, for secured debt.
The regulator's expectations, published March 15 in an addendumto its larger set of policies on NPLs, are not formally binding but will informthe ECB's approach to setting capital requirements for individual lenders underthe supervisory review and evaluation process, or SREP, Donnery toldjournalists at a press conference.
The SREP summarizes the findings of bank supervisors of agiven year and asks banks to bolster their capital position if necessary.
"The guidance now forms part of the day-to-daysupervisory dialogue with individual banks," said Donnery, who is also thedeputy governor of Ireland's central bank. "The joint supervisory teamsare engaging intensely with banks regarding the implementation of the guidanceand the work has started to bear fruit. However, the challenge remains significant."
She said large banks in the euro area held €759 billionin NPLs at the end of September 2017, down from €950 billion in March 2016.Many of these bad loans were accumulated during the global financial crisis.
Donnery stressed that the expectations are non-binding,but that the ECB will regularly discuss any divergences between banks'provisioning practices and the central bank's expectations, and assess whetherany supervisory measures under the Pillar 2 capital framework are needed.
Pillar 2 capital requirements form part of the global capitalrules for banks, and are designed to improve the links between capital planningand risk management.
Giving banks time to adjust, the ECB will factor theircompliance with the addendum into its capital requirements for the first timein 2021. The addendum is expected to have a "modest" and"manageable" impact on the capital base of banks, Donnery said,adding that the ECB will also take into account the general way NPLs aremanaged when issuing its binding Pillar 2 capital requirements before 2021.
The Irish central banker also said the addendum iscomplementary to the European Commission's proposal March 14, which, among otherthings, set out the creation of a "backstop" – a minimum level ofprovisioning against new bad loans that, if not followed, would be deductedfrom banks' capital. Once adopted by the European and local legislatures, theCommission proposals will be mandatory, Donnery said.
The ECB and the Commission "are liaising closely inthis regard," she said.
Commenting on the virulent backlash from eurozonepoliticians and banks that followed the publication of the first draft of theaddendum in the autumn of 2017, Donnery admitted that the initial text"had not been articulated clearly enough" in the sense that it leftthe impression the new guidelines would apply to the existing stocks of badloans, would be binding and would apply automatically to all banks the ECBsupervises.
"It was never our intention to imply that it wasbinding or that this was an automatic instrument," Donnery said.
