World Economy

ECB Joins Calls for Digital Platform to Trade NPLs

Eurozone banks hold around €921 billion of NPLs, or 6.1% of the total amount of debt on their books
Italian lenders are among the most affected by bad loan woes and fear too quick  and high provisioning targets could hit their balance sheets.Italian lenders are among the most affected by bad loan woes and fear too quick  and high provisioning targets could hit their balance sheets.

Eurozone authorities should create a an electronic platform to trade "non-performing" loans weighing down the single currency area's banks, the European Central Bank urged late Monday.

"Market failures" are hobbling trade in debt or close to default in the 19-nation currency zone, ECB economists found in a paper, with a too-small number of buyers pushing down prices and numbers of transactions. Currently just 67 investors are active in buying so-called "NPLs", news outlets reported.

Lending growth to non-financial corporations, a key plank in the recovery, rose to 2.9% in October from 2.4% a month ago, hitting its highest rate since mid-2009, ECB data showed. Household lending growth was meanwhile unchanged at 2.7%.

A high proportion of bad debt in the banking system can hold banks back from lending to financially healthy businesses and households, hobbling economic growth.  Eurozone banks hold around €921 billion ($1.1 trillion) of NPLs, or 6.1% of the total amount of debt on their books.

But over the past three years, only €200 billion of bad debt have been traded, ECB vice-president Vitor Constancio said in February.

Creating an electronic system to share data and trade NPLs would attract more buyers by creating more transparency and reducing transaction costs, the economists argue.

Tax incentives could prod banks to use the platform, they add, while authorities would only need to remove a small number of hurdles for electronic trading and data-sharing to become feasible.

Economics and finance ministers from the EU's 28 member-countries in July called on the European Commission, the ECB and the European Banking Authority to lay down the standards on data about NPLs needed for electronic trading platforms to work.

No Mandate

The ECB does not have the mandate for its plan to ask euroland banks to set aside more cash to cover bad loans, the European Union Council said in a legal opinion, in a further blow to the ECB proposal, Reuters reported.

The draft plan is out for public consultation until next week and has run into opposition from various quarters including the European Parliament and now the EU Council, the bloc’s other legislative body which represents its members’ governments.

The council’s non-binding document, seen by Reuters and dated Nov. 23, said the law governing the ECB’s supervisory powers over eurozone banks “prevents the ECB from adopting instruments of soft law, such as the draft addendum to the ECB guidance to banks on non-performing loans.”

The ECB cannot adopt measures “intended to ensure compliance by banks of criteria for minimum provisioning which are not, or not yet, the object of harmonization by the EU legislator,” it said.

This echoes the stance of the European Parliament’s legal services that the ECB would be overstepping its authority with its proposed guidelines. EU rules say supervisors can impose binding capital measures on specific banks but not on the entire banking system.

The chair of the ECB supervisory body, Daniele Nouy, said guidelines do not equate with laws. She has defended her plan but hinted at the possibility of postponing its entry into force.

The document will be discussed by EU states’ economic envoys on Tuesday when they meet to prepare the monthly gathering of EU finance ministers, EU officials said. “EU states usually follow legal opinions, although final decisions are political,” one official told Reuters.

Italians Among the Most Affected

After a meeting of eurozone finance ministers on Nov. 6, the chair Jeroen Dijsselbloem said there was “a general agreement” in favor of the ECB approach on bad loans. Italy’s Finance Minister Pier Carlo Padoan later disagreed and called for more time for banks to adapt to stricter requirements.

Italian lenders are among the most affected by bad loans’ woes and fear too quick and high provisioning targets could hit their balance sheets.

EU states agreed in July on a plan to tackle the build-up of NPLs and gave the EU executive commission a mandate to present legislative measures which could require banks to provide for NPLs with more cash for newly issued loans. The commission will make its proposal next year.

Warring EU institutions who fail to resolve conflicts through other means can take such matters before the European Court of Justice.


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