Brussels (Brussels Morning) The European Commission put forward a proposal on Wednesday to help banks in individual member states shed uncollectible loans, freeing up their assets to provide fresh lending to households and businesses hit by the covid crisis, Reuters reported.
Because of the coronavirus pandemic, an increasing number of households and businesses in the EU, especially small and medium enterprises, have encountered financial problems. For many, this means having difficulties in repaying their loans.
Market for bad loans
The proposal, as presented by the EU financial services commissioner Mairead McGuinness, is to create a network of national “bad banks”. This would result in a much more efficient market for non-performing loans, or NPLs, while a central database would enhance transparency.
The so-called “bad banks” would buy NPLs from banks in member-states, helping them restore their capital adequacy ratio, which in turn would provide banks with more capital for granting new loans.
The proposal emerges from lessons learned in the previous financial crisis, which demonstrated that failing to tackle NPLs meant banks’ assets would be tied up, and therefore unable to offer fresh loans so necessary to restarting the economy after a crisis.
No EU-level bank
Despite the ratio of NPLs among total loans in EU banks at the end of June having grown only 0.2 percentage points to 2.8% from Q4 2019, the European Central Bank’s (ECB) head of banking supervision Andrea Enria warned that there could be a huge wave of unpaid loans coming, estimated at upwards of 1.4 trillion euro.
While Enria called for the creation of an EU-level “bad bank”, the Commission decided for a less centralised approach, convinced that the process of reaching agreement on the EU bad bank between all member states would have wasted too much precious time.