16 March, Il Sole 24 Ore
The EU has published new legislative measures to reduce the stock of bad loans. The vice president of the EU Government Valdis Dombrovskis, interviewed by Il Sole 24 Ore, explained that the initiative should favour the agreements between the member countries in order to create a single European banking system, with a common guarantee on deposits. Moreover, the measures “go beyond the executive plan approved the Governments in June 2016”. At this stage, the European Central Bank and the European Commission seem to have reached an agreement.
What are the main principles of the new legislative measure?
It’s an articulate strategy. It implies common standards on the provisions of banks concerning bad loans in order to have more clarity and homogeneity. In addition, there are rules for the creation of voluntary national platforms to manage NPLs (the so-called bad banks); provisions that promote the sale of low-quality securities on the secondary market, solving in this way the informative asymmetry issue; finally, there are the steps to improve the effectiveness of bankruptcy laws at a national level.
Which is your objective concerning bad loans?
Basically, we want to offer simple rules regarding the level of assets required for banks. We’ll differentiate between secured and unsecured credits. For the former, the provisions must cover the entire amount of the credit in eight years. For the latter, the time will be two years. We expect from banks to identify losses faster than in the past, incentivising loans for the goods economy. I would like to clarify that the measure concern new credits, in the case these become bad loans.
This a big difference from the cautionary measures presented by the ECB.
Yes. Our provision is legislative, and it concerns the new credits of any bank. While the measures from ECB apply to banks taken singularly, for surveillance purposes, considering old as well as new credits.
Besides the single surveillance authority and the shared system of credit management, there is still left the creation of a joint guarantee for deposits in order to achieve the goal of a single banking system. Governments are always struggling to find the balance between risk reduction and disclosure of risk on banks’ financial reports. Do you believe that your measures will favour the agreement between countries?
We’re making steps forward to reduce the risks on the financial statements. Bad loans in the EU have reduced by one-third since the peak of the recession (from 6.7% to 4.4%). Italy has made an excellent job. For this purpose, our measures will contribute accelerating the bad loans reduction process.
Eight EU member countries have stressed in a letter addressed to their partners the necessity to continue with the reduction of banking risk before going ahead with sharing the risks and the common responsibility on deposits. What is your reply?
As I said, I believe that our measures will favour the implementation of the common guarantee system on deposits as well as the choice of appointing the European Stability Mechanism (ESM) for the financial protection of the Single Resolution Fund until this won’t be operational. From my point of view, these measures provide the foundations for the share of risks since they’re focused on risk reduction. The efforts to reduce risks have been enough. But we’re aware that it’s up to the single countries.
In their letter, eight countries – including the Netherlands and Sweden – still believe in the necessity of rules limiting the exposure of banks to public debt in order to avoid vicious circles. What do you think?
In 2016 the 28 members agreed to take decisions at an international level. Recently in Basel, the regulators decided to avoid making global decisions. Now the EU has to decide whether to re-open the discussion. The Commission is cautious in introducing new regulations, fearing of starting a financial crisis.
From this point of view, shouldn’t the European Commission find an agreement on a common guarantee on deposits? The ECB thinks it’s the right time.
As I said, we believe it’s not time to take a decision about sharing risk. For this purpose, our measures go beyond the operational plan approved by the Governments in June 2016.
Source: Il Sole 24 Ore
Translator: Cristina Ambrosi