ECB warns banks who fail to meet new bad-debt guidance

The European Central Bank (ECB) has warned banks who fail to meet its new "guidance" on setting aside provisions to cover future bad loans that they face the imposition of higher capital levels and possible sanctions.

The ECB confirmed on Wednesday it plans to introduce a non-binding requirement that banks, from January, set aside enough money to cover 100 per cent of new non-performing unsecured loans within two years. Lenders would have up to seven years to reach full provisioning for soured secured loans.

Sharon Donnery, deputy governor of the Central Bank of Ireland and chair of the ECB's non-performing loans (NPLs) task force, said that banks would not initially be forced to meet the new guidance but have to explain themselves if they don't comply.

However, she made clear that that banks that lag behind face higher capital ratios being imposed on them by the ECB, more intrusive on-site supervisory inspections and, ultimately, sanctions.

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“All of that engagement may ultimately lead to a legally-binding decision from a legal process,” Ms Donnery said on a call with reporters on Wednesday. “If you don’t comply with that, it could lead to a sanction.”

The ECB, which took over the supervision of euro-zone banks in late 2014, has prioritised the tackling of NPLs across the sector, with the level of NPLs across larger banks having fallen from €950 billion in the first quarter of last year to €865 billion at the end of last March.

Most exposed

While Ireland’s banks have cut their NPLs from an average of 27 per cent of their loan books in 2013 to 14.2 per cent at the end of last year, they remained well above the 5.4 per cent EU average, leaving the Republic among banking systems most exposed to the ECB’s drive to draw a line under the issue. Greece, Italy and Cyprus also have elevated NPL levels.

Banks with high levels of NPLs have had to submit plans to the ECB on how they plan to resolve the issue. AIB and Permanent TSB have outlined plans in recent months to sell some soured loans and offer mortgage-to-rent alternatives to struggling mortgage holders as they add further tools to drawing a line under the issue – almost a decade after the financial crisis began.

“Supervisors will continue to monitor bank-specific progress in NPL reductions and present, by the first quarter 2018, their considerations of further policies to address the existing stock of NPLs,” the ECB said in documents published on Wednesday.

Davy analysts said the ECB’s new provisioning guidance, which has been put out to public consultation until early December, will in effect force banks to restructure bad loans more quickly or sell them off to non-bank entities to resolve.