The ECB’s new rules forcing lenders to set aside more cash for loans that go unpaid may come into force on April 1, three months later than originally planned, the ECB’s chief supervisor Daniele Nouy said.
Heavy criticism from southern nations forced the ECB to rethink its proposal and while no fundamental change in the proposal is likely, the ECB is expected to refine its text to fend off criticism. Banks were sitting on €759bn worth of soured debt at the end of the third quarter with banks in Italy, Greece, Ireland, Portugal and Slovenia struggling the most.
The ECB proposal would give banks seven years to fully provision newly soured credit backed by collateral and two years for unsecured debt. However, it would not affect already soured debt, which will be covered in a separate proposal. Irish bank chiefs have in recent times been under intense scrutiny over their plans to reduce their bad loans on their books.
Chair of the Oireachtas Finance Committee John McGuinness last week told EU financial services commissioner Valdis Dombrovskis that Irish banks were ignoring the commission’s direction to write down household and business debt.
He said lenders were selling troubled loans to vulture funds instead. Ms Nouy said the new rules will be unveiled by mid-March and could become effective on the first day of the following month. “I know that the date of April 1 is a possibility but nothing yet has been decided,” she said.
Sources close to the discussion had said if the package comes into force from April 1, provisions would likely have to be built from the next accounting period, or mid-year for most. As part of the clarification, the ECB will stress that the rules will be applied on a case-by-case basis and there will be no automatism to force provisioning, a move which could be seen as encroaching on regulatory or legislative prerogatives.
Bad debt weighs on banking balance sheets and holds back lending, countering the very stimulus the ECB is trying to provide with rock-bottom interest rates.