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Commission warns ECB on NPL crackdown

The ECB wants to make it harder for European banks to hold onto NPLs.

The European Commission has backed the European Parliament’s proposals to water down new rules on banks holding non-performing loans (NPLs), according to Real Estate Capital’s sister title, Private Debt Investor.

In a consultation document published by the commission last Friday, the Commission put itself at loggerheads with the European Central Bank (ECB) which wants to make it harder for European banks to hold onto NPLs.

The ECB’s draft guidelines – published in March, updated in October and set to come into force in January 2018 – would require lenders to post collateral within two years against the entire unsecured part of their NPL portfolio. Furthermore, it proposed that banks should collateralise even secured loans within seven years.

Controversially it also wished to apply these new stricter requirements to existing loan portfolios, rather than only those built up after the new rules come into force.

Last Wednesday, the EU’s Parliament said the ECB had gone beyond its mandate with proposals for new binding rules on the euro zone banks it supervises.

The Commission’s consultation paper, which is seeking stakeholder responses by 30 November, states: “Binding measures and requirements, however, can only be applied by the supervisor on a case-by-case basis depending on the individual circumstances of the bank.”

“Individually tailored supervisory measures following a case-by-case assessment by the competent supervisor are appropriate for dealing with the specific NPL-related risks of individual banks.”

If the central bank is forced to back down it will only be able to intervene to force banks to shore up their collateral on an individual basis where a bank is seen to have a particularly risky portfolio or other circumstances where the NPL portfolio could pose a threat to its stability.

The ECB has stated it wants to reduce euro zone banks’ stock of nearly €1 trillion of bad loans, which it views as a major barrier to the financial recovery of the single currency area.

ECB officials have already rolled back on the plans to apply the rules to existing loans, with banking lobbies complaining banks would have been forced to fire sale their bad loan portfolios.

Private debt funds and hedge funds that invest in NPLs were facing a potential windfall if banks are to be forced to rapidly offload significant chunks of their existing bad loans. At the time, one Italian official told the Financial Times the proposals would mean “Hedge funds who are specialised in buying these will build huge fortunes”.

Despite the likely softening of the rules, the increased scrutiny of NPLs and higher capital requirements placed on banks could see many new opportunities for specialist NPL buyers arising across the euro zone in the coming years as banks look to offload portfolios of bad loans.