Bad Loans

defaults on receivables

Since the optimism level in the banking sector has been highest in Europe in recent years, banks are being asked to grant non-performing loans. It is worth knowing the difference between good and bad debt before borrowing money. EZB looks for compromises for the non-performing bank loans issue

Despite a strong decline in the last two years, eurozone banking institutions still have 721 billion dollars (837.01 billion dollars) of outstanding debts, mostly from the 2008-12 financial turmoil, focused on Italy, Greece and Portugal. The ECB's Single Supervisory Mechanism (SSM) plan to establish regulations requiring institutions to provide liquidity for this collateralised loan within a certain period of time encountered opposition from institutions, legislators and even the Federal Reserve.

It could consist of giving a number of years to a bank to make non-performing loans available, as proposed in the initial draft, and at the same time introduce exemptions, for example for those jurisdictions where a sluggish justice system makes it difficult to recover securities, such as Italy. As an alternative, regulators could abandon such a so-called calendar-based paradigm entirely and split banking and lending into "clusters" depending on what part of their books went wrong or whether they are facing an sector with known issues such as maritime transport.

This was the last attempt of the SSM to save the last part of a three-year joint project to take a line under the eurozone sovereign and bank debts crises. However, the question of bad loans has led to a gap between a few nations where there are still a large number of bad loans, such as Italy, which did not save its bankers during the financial turmoil, and the other.

As a result, SSM has delayed the release of the new regulations initially scheduled for March. In April, the SSM said it was considering whether further guidelines for legacies of non-performing loans (NPLs) were necessary "depending on the level of advancement of individual institutions". SSM has already established regulations for unsecured loans that give seven years for bankers to take care of when they are secured by securities and two when they are not.

SSM had originally intended to apply these provisions to the portfolio of old loans. However, an IA by ECB members of the ECB's monetar y-policy unit revealed risk to the functioning of the finance system, as some banking institutions would be obliged to allocate billion euro to their loans.

It has proved difficult for vulnerable institutions such as Italy's Monte Paschi, which needed state aid at the end of 2016 after failure to obtain funds on the markets. SSM, which is officially separate from the remainder of the ECB, had achieved a more favourable result by expecting further reductions in non-performing loans by individual institutions, as they have done in the last two years.

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