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Moody’s. Impact of New ECB Rules on NPLs Will Be Limited

13 October 2017

Moody’s believes that the new ECB rules on provisions for bad debts will have a limited immediate impact on European banks

Moody’s believes that the ECB’s new regulations on provisions for bad debts should have a small immediate impact on European banks, but that the harmonisation of these rules could have significant effects in countries such as Portugal.

Last week, the ECB published new proposals on non-performing loans focused on how they should be accounted for in the banks’ balance sheets and provisions. The document will be open for public consultation until December 4.

The new guidelines, which will be applied to loans in default after January 1, 2018, say that unsecured loans should be fully provisioned within two years and bad loans guaranteed for a maximum of seven years, after being classified as problematic (NPL – Non-Performing Loans).

These rules apply to the 120 eurozone banks that the ECB supervises directly, including the Portuguese banks CGD, BCP and Novo Banco.

The rating agency believes that, despite the increased requirements, the immediate impact on the provisioning requirements of European banks will be small. This is because the formation of new non-performing loans is currently relatively low, given the low-interest environment (which facilitates the payment of credit by bank customers) and that the additional provisioning would only have to be in force between two and seven years after being considered NPL, leaving any real effects to 2025.

However, it believes that it will not be sustainable to maintain two provisioning policies, one for bad credit before 2018 and one for distressed debt after January 1, 2018, and that, in the medium term, Frankfurt is likely to harmonise them.

“When this happens, it will likely require significant new provisions in banks where NPLs are large, and coverage is low,” says Moody’s, saying that any new policies of that nature would primarily affect countries like Portugal, Italy and Ireland.

Moody’s also says that the new policies are a tacit admission by Frankfurt that existing measures to improve bank balance sheets are not bringing rapid benefits.

Since the financial crisis, which led to the growth of distressed loans, the central bank has drawn attention to the need for banks to reduce bad debts, which weigh on the banks’ balance sheets and limits the ability to grant new credit.

In 2011, the idea of the creation of a ‘bad bank’ in Portugal was mooted, but the lack of flexibility of public finances made this solution unfeasible since it would require a kind of state guarantee. This option was pursued, in different ways, in Ireland and Spain.

Thus, in recent years, the banks have carried out varied NPL reduction strategies.

Recently the Portuguese government has participated in the creation of a credit management platform between BCP, Caixa Geral de Depósitos and Novo Banco, which helps to restructure loans, but the measure is seen as just one more step in the process of resolving the problem of NPLs.

The restructured credits will remain on the balance sheets of the banks involved in the platform.

Original Story: Dinheiro Vivo / Lusa

Photo: Reuters – Mike Segar

Translation: Richard Turner