The European Central Bank (ECB) announced its own measures to prevent Europe’s banks from becoming embroiled in another non-perfoming loans (NPL) crisis, following the mid-March announcement of the European Commission (EC) of a plan to achieve the same goal, although by different means.
According to Euromoney, «these moves are part of an effort to appease some jurisdictions, most notably Germany, hesitating to agree to a pan-European depository insurance scheme (EDIS). The reluctance stems from the higher perceived risks in banking markets such as Greece, Cyprus and Italy, where the NPL problem has been most acute and progress has been relatively slow».
The EC’s proposal provides hope that full banking union could be completed by June this year, says EC vice-president Valdis Dombrovskis. EDIS is the final piece of that plan. The EC proposal seeks to introduce a minimum coverage ratio for NPLs through an amendment to the Capital Requirements Regulation, meaning that it will be binding for all banks in the Union. Loans originated after March 1 this year will be subject to a timeline of increasing provisions. Secured loans would need a coverage ratio of 5% in year one, increasing to 100% by year eight. Unsecured loans would need 35% coverage in year one; 100% by year two. Banks would do this either by deducting from their capital or writing them off via profit and loss provisions.
The ECB’s guidance, on the other hand, is non-binding and will be set on a case-by-case basis. It only applies to loans that become delinquent after April 1, regardless of origination date and it differs in its timeline for secured loans, which would need to be fully provisioned by year seven. Its incremental step ups are also different to the EC’s, with secured loans needing 40% provisioning after three years of being classified as non-performing.
The ECB noted that if it deems Pillar 1 requirements as insufficient for any given bank, it may implement Pillar 2 requirements.
How the two proposals (if the Commission’s is adopted) would interact is unclear.
Original Story: Euromoney (Graham Bippert)
Edition: Prime Yield