Saddled with 750 billions euros in sour loans, ECB’s guidelines had wanted banks to hike up their provisions against these non-performing assets.
On Thursday, the European Central Bank stated although its guidelines on the treatment of non- performing assets of banks will be effective from April 1, 2018, lenders may get a reprieve from its full implementation until 2021.
The central bank has been weighed down by 750 billion euros worth of existing NPAs and banks across the eurozone are straddled by this huge debt which is acting like a drag on new loans and weakening the effect of its economic stimulus.
As part of its economic stimulus across the Eurozone, the ECB has significantly lowered borrowing costs through rock-bottom loan prices.
These latest guidelines are aimed at easing concerns of its original proposal and the ECB has made it clear that they are non-binding and merely serves as the basis for case-by-case dialogue with banks on how they provision against bad debt.
“The result of this dialogue will be incorporated, for the first time, in the 2021 Supervisory Review and Evaluation Process,” said the ECB in a statement.
“Banks should use the time to prepare themselves and also to review their credit underwriting policies and criteria to reduce the production of new non-performing loans (NPLs), in particular during the current benign economic conditions.”
According to the most recent guidelines, banks in the Eurozone will have two years to fully provision for non-secured NPAS and it will have 7 years in the case of secured loans.
European parliamentarians and banks, especially those from Italy, fear that forcing banks to provision against their bad loans is likely to weaken lending, which in turn is likely to adversely effect the economy; those economies that have already missed the bus on the brisk economic expansion that is taking place across the Eurozone will be especially vulnerable.
This is why they have argued that the guidelines were contrary to EU legislation as it set blanket rules for an entire sector, a move outside a supervisor’s prerogative.
“The addendum is non-binding and will serve as the basis for the supervisory dialogue between the significant banks and ECB Banking Supervision,” said the ECB.