Brussels Presents Package of Measures to Tackle Bad Debts in the EU

14 March 2018

The European Commission presented a package of measures on Wednesday aimed at tackling the high levels of bad debts in the European banking sector. The plan, among other proposals, calls for financial institutions to set aside funds to cover the risks associated with loans, as well as guiding member-states in the eventual creation of entities for purging toxic assets – the so-called bad banks.

Four key features make up the European Commission’s package, which was presented by Valdis Dombrovskis, the vice-president of the community executive, who oversees financial stability.

In addition to insisting that banks set aside higher level of capital reserves to protect against future increases in credit defaults, the Juncker Commission is in favour of developing secondary markets for the sale of bad debts. It is also seeking to encourage out-of-court settlements so that financial institutions can recover collateralised loans more quickly, a measure limited corporate loans. Finally, it is proposing to regulate the creation of entities, using public funds, that would manage the toxic assets, the bad banks.

“Now that Europe and its economy are recovering, Europe must seize this momentum and accelerate the reduction of NPLs. This is essential to reduce risks in the European banking sector and strengthen its resilience. With fewer NPLs on their balance sheets, banks will be able to lend to more families and businesses,” Valdis Dombrovskis argued.

Although they have declined in recent years, bad debt levels remain one of the most significant risks to banks in the European Union. At the same time, the territorial distribution of these loans is heterogeneous.

In the third quarter of last year, example, Greece accounted for 46.7 percent of banks’ NPLs, while Italy had 12.1 percent in Italy and Germany, just 2.1 percent. The EU average was 4.4 percent.

“Different Contexts”

The measures being put forth by Brussels must still be approved by the EU’s Member States, as well as the European Parliament.

The European Central Bank is also expected to present its own roadmap for managing bad debts on Thursday after Italian authorities warned of the potential effect of tightened rules on the performance of its economy.

Mr Dombrovskis pointed out that the Commission and the ECB “work in different contexts” and “do not copy each other.” The EU executive, the vice president, explained, produces “regulatory measures,” while the European Central Bank works on “supervisory measures.”

The European Banking Authority revealed its position on the EC executive’s plans in the morning, arguing that the banks’ obligation to set aside reserves for losses on loans would have a moderate impact on global capital requirements and could potentially boost returns.

Original Story: RTP Notícias – Carlos Santos Neves

Translation: Richard Turner