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Italy 
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Governor Says NPLs Need to Be Reduced for Banking Union to Advance
9 October 2017
The Governor of the Bank of Portugal said today that a reduction in banks’ bad debts is essential for the European common deposit guarantee system, one of the pillars of the Banking Union, to go ahead.
Carlos Costa commenced the XXVII Lisbon Meeting between central banks of Portuguese-speaking countries and dedicated the speech to the European Banking Union, which has yet to be concluded.
“There is a balance between risk-sharing and risk-taking. Therefore, the reduction of bad debts or NPLs is a critical issue for an eventual banking union, as it determines the stability of the banking system and the pace of creation of the union,” the governor of the Bank of Portugal stated.
Since the financial crisis, which led to an explosion in distressed assets, the central bank has drawn attention to the need for banks to reduce bad debts, which weigh on their balance sheets and limit their ability to grant new credit.
In 2011, the creation of a bad bank was mooted, but the lack of flexibility in Portugal’s public finances made this solution impossible since it would require a kind of state guarantee. This solution was followed, in different ways, in Ireland and Spain.
Thus, in recent years, banks have pursued individual NPL reduction strategies.
Recently the Portuguese government took part in the creation of a credit management platform run by BCP, Caixa Geral de Depósitos and Novo Banco, which will help restructure loans. The solution is seen as but one step in a resolution to the difficulties concerning NPLs.
Restructured credits remain on the balance sheets of the banks participating in the platform.
The future banking union consists of three pillars: the Single Supervisory Mechanism is the first and is already operational, run by the European Central Bank (ECB), which directly oversees the leading European banks, including the Portuguese banks Caixa Geral de Depósitos (CGD), BCP and Novo Banco.
The second pillar is the Single Resolution Mechanism, which is set up to resolve and restructure banks posing a risk of insolvency. The goal is to endow the fund with 55 billion euros by 2024, a figure that will come from contributions from the banks. It will also be able to finance itself in the markets through debt issuance.
Finally, the third pillar is the common Deposit Guarantee Fund. This part of the process is lagging, with many doubts about its implementation, with many countries, such as Germany, creating obstacles.
Original Story: RTP Notícias / Lusa
Translation: Richard Turner