Bad loan sales will continue despite let up in ECB pressure
The European Central Bank (ECB) has increased the time banks get to sort out bad debts but it will not slow loan sales here.
Banks will now get more time to set aside cash to cover bad loans after the ECB bowed to pressure from Brussels to ease its rules. But the change will only impact loans that have gone sour since early 2018 and into the future, Diarmuid Sheridan of Davy said.
Irish lenders have sold billions of euro of bad loans over the past decade, initially property and developer loans but have ramped up their mortgage sales in recent years as regulators heaped on pressure to reduce those loans.
“Sales of loan books by the Irish banks will continue, regardless of this change,” Mr Sheridan said. “The ECB has made it clear it does not want banks to hold bad loans.”
The new terms will affect Irish banks into the future, including potentially the fallout from a Brexit shock.
Banks will now have three years to set aside cash against a bad loan if it is unsecured, nine years if it is backed by real estate, and seven years for other types of collateral, the ECB said, in line with a timeframe set by the EU Parliament in April.
The move by the ECB’s new chief supervisor, Andrea Enria, ends a two-year dispute between Frankfurt and Brussels on an issue once worth a trillion euros in soured credit – for the most part a legacy of the last recession.
The ECB’s previous, more stringent timeframe had led to an angry backlash from banks and lawmakers, particularly from those in Italy.
Still, ECB supervisors reserved the right to set different targets “if the specific circumstances really warrant”.
Eurozone banks have almost halved the pile of non-performing loans (NPLs) weighing on their balance sheets.
These totalled €642.5bn at the end of March, compared with over a trillion in 2015.
But the proportion of bad loans out of the total was still a staggering 41.4pc in Greece, 21.3pc in Cyprus, 11.5pc in Portugal and 8.4pc in Italy.
“Despite recent progress, the ECB considers it of the utmost importance that the level of NPLs is further reduced, thereby resolving them in a swift manner while economic conditions are still favourable,” the ECB said.
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