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ECB clarifies guidance on toxic loans after backlash

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ECB clarifies guidance on toxic loans after backlash

The European Central Bank has clarified its guidance on how it wants banks to deal with bad loans after a backlash to suggestions that it would impose specific caps, with a high-ranking official saying the central bank instead wants to ensure that lenders have "ambitious" targets in place.

The ECB, which directly supervises 119 of the eurozone's largest and most significant banks, announced in late 2017 that it would toughen its scrutiny of so-called nonperforming exposures, suggesting that it might enforce higher provisioning requirements for both newly formed bad assets and the hundreds of billions of euros worth of dud loans sitting on eurozone balance sheets. Both suggestions, the latter in particular, especially spooked Italian bankers and regulators, who have vocally opposed the idea.

The ECB had said it would look to publish new rules by March, but reports later suggested that the timeline would be extended pending legislative action.

Victor Massiah, CEO of Unione di Banche Italiane SpA, said Jan. 25 that it was "very clear that regulators wish to see a single-digit, and not a double-digit, ratio over a relatively short timeframe," according to Reuters. Other bankers have made similar comments to the newswire, suggesting that although the ECB had rowed back on its proposals for new rules, it was still pressuring individual banks to take action.

But Ramon Quintana Aguirre, director general for microprudential supervision at the ECB, said suggestions of specific ratio mandates were unfounded.

"We want clear, unambiguous targets and for them to be closely monitored," Aguirre said Jan. 29 during a conference in Athens. "We want these strategies to be ambitious. The parameter we have selected is the amount of nonperforming exposures and how it is going to decline over a three-year horizon. We are not talking about ratios but amounts."

Nonperforming exposures include some restructured loans as well as loans that have yet to reach the 90-day past-due threshold to be officially classified as nonperforming loans, or NPLs, but that the bank believes are unlikely to be repaid, such as in the case of bankruptcies.

The ECB will closely supervise the banks' activities in dealing with bad loans, particularly where it sees problems, Aguirre said.

"We have requested an update on [NPL] strategies by March 2018 and in the meantime, after this assessment, we will send follow-up letters to these banks to ensure that the shortcomings, whether about the strategies, operational plans or other elements, were taken on board," he said.

Regulators also expect top management to be involved in running down bad loans, he added.

"We want them to be robust strategies," he said. "Firstly this means that the management body of the bank has to have strong ownership and oversight of these strategies, and obviously close monitoring of deviations and performance that becomes negative."

Banks will need to develop different ways of shedding soured assets, Aguirre added: "We also expect banks to improve their capabilities in terms of dealing with nonperforming exposures in different ways — it can be worked out, or other processes such as securitizations, sales and liquidations of collateral."

Apart from Italy, five other countries in the eurozone had banking sectors with double-digit NPL ratios as of the middle of 2017: Cyprus, Greece, Ireland, Slovenia and Portugal. Italy's fell to 12.2% as of mid-2017 from 16.2% a year earlier.