LONDON (Reuters) – The European Union on Wednesday presented plans to help banks get rid of bad loans more easily and continue lending to households and businesses affected by the COVID-19 pandemic.
A lesson from the previous financial crisis was that failure to tackle bad or so-called non-performing (NPL) loans prevented banks from continuing to lend, which is the cornerstone of recovery in a region that relies on strongly from banks for business financing.
The volume of distressed loans is expected to increase next year after the expiration of mortgage repayment holidays for households and relief measures for businesses, which were introduced when economies went into lockdown.
Non-performing loans represented 2.8% of loans from EU banks at the end of June, up 0.2 percentage point from the fourth quarter of 2019.
The head of banking supervision of the European Central Bank, Andrea Enria, has warned that there could be a “huge wave” of unpaid loans that could exceed 1.4 trillion euros (1.7 trillion dollars).
“To do nothing would lead to a credit crunch, which would mean more businesses fail and jobs will be lost,” European Financial Services Commissioner Mairead McGuinness told reporters.
Building on earlier measures from 2017, the European Commission presented proposals for a more efficient bad loan market by creating a network of ‘bad banks’ to manage problem debts, supported by a central database to improve transparency and help find buyers for NPLs.
He stops, however, at the creation of the bad bank at EU level that Enria had called for, because reaching an agreement on this would have wasted “precious time”, said an official of the EU.
The Association for Financial Markets in Europe, a banking lobby group, said the action plan was “unambitious” and would not be enough to deal with a build-up of post-COVID bad debt.
European consumer protection body BEUC said the measures left borrowers vulnerable to their loans falling into the hands of “vulture funds” who aggressively seek repayments, but McGuinness said borrower protection was “in the foreground” in the plans.
To improve transparency in the sale of loans, banks may be required to use a template to ensure that the details of NPLs are comparable across the EU.
Brussels also wants greater convergence of national insolvency rules and suggests that a bank buying bad debts should not set aside more capital than the seller to hedge against a possible default.
The EU package also clarifies the bloc’s rules on state aid to banks during economic shocks, known as ‘precautionary measures’. Under this provision, no funds should be given to lenders who were already suffering from problems before COVID-19.
“This package is not money for the banks,” McGuinness said.
($ 1 = 0.8205 euros)
Reporting by Huw Jones; Editing by Kevin Liffey and David Goodman