March 13, 2018 / 4:34 PM / 9 months ago

EU banks to face bigger backstops for new bad loans: draft

BRUSSELS (Reuters) - European Union banks will have to set aside more capital against new loans that could turn sour as of Wednesday, when the European Commission will publish a proposal on larger backstops for bad debt, a draft document showed.

European Union flags flutter outside the EU Commission headquarters in Brussels, Belgium, March 12, 2018. REUTERS/Yves Herman

The European Commission document, seen by Reuters, said the new rules would apply to loans originated from the date of the adoption of the proposal, which is Wednesday, opening them up to potential challenges as banks could face obligations before the new rules take effect.

Banks will have to write down within two years new unsecured loans that turn bad, and secured bad loans within eight, via a gradual but non-linear reduction of their exposure, the document showed.

The revised provisioning requirements will not cover the huge amount of bad debt already on bank’s balance sheets.

The commission had considered, but dismissed, the option of postponing the date at which new loans would be covered by the proposed stricter measures to when the proposal was approved by EU states and legislators, a process that could take several months.

Italy, whose banks are among the most affected by bad loan burdens, has long called for a more gradual offloading of soured debt, fearing lenders could face large capital holes if they were forced to write down such loans too fast.

However, the problem concerns mostly old loans. New credit has less of a tendency to turn bad because of better market conditions and banks’ more cautious lending practices since the financial crisis.

Italy’s outgoing finance minister Pier Carlo Padoan welcomed the commission’s proposal on Tuesday, telling a news conference in Brussels that it would make sales of bad debt easier.

Among a package of proposals to be issued on Wednesday, the Commission will also include measures to speed up the sale of bad loans in the secondary market, which should facilitate the sale of existing bad stock at prices that are not very far from banks’ valuations.

EU states and legislators will have to approve the proposals, which will come a day before the European Central Bank releases guidelines on how to speed up the offloading of newly classified bad loans.

Reporting by Francesco Guarascio; editing by Philip Blenkinsop and John Stonestreet

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