Provisions against bad loans at euro zone banks are "reasonable", the European Central Bank's head of supervision said on Tuesday, adding a planned clean-up of lenders' balance sheets would take into account their difficulties. The ECB has made tackling non-performing loans, which are curbing a recovery in lending, one of its priorities for 2016 and launched a review of how banks should deal with bad debt.
Fears the euro zone's top banking watchdog might impose higher provisions or losses on soured bank credit contributed to a slump in euro zone banking shares earlier this year, particularly in countries where the level of bad loans is higher, such as Italy. The ECB's chief supervisor, Daniele Nouy, appeared to address some of these concerns on Tuesday by saying provision levels were already "reasonable" and the clean-up would take place over a long time and take into account the challenges banks are facing.
"We have provisioned to a reasonable level these non-performing exposures and this is giving us a very solid ground to ... address the issues," Nouy told the European Parliament's economic committee in Brussels. "We definitely take into account the difficulties of the situation but it's something totally achievable." She dismissed, however, the notion of a generalised write-off of bad loans, arguing it may be ineffective and set a dangerous precedent.
"Should there be a major write off? I'm sceptical about that because I don't believe that a single tool can address different situations," Nouy said. "It goes against the establishment of a sound culture, which is 'you repay your loans'." The ECB has developed individual plans with banks to tackle loans at risk of non-payment, Nouy said in her opening statement, adding she expected progress in the coming years.
"The ECB has worked extensively with banks ... to develop individual ... action plans," Nouy said. "While it will take some time to bring down bad loan stocks, good progress over the next few years can be expected." Nouy also reiterated her concerns that low interest rates may erode profits at some banks, limiting their ability to generate capital. The ECB cut its three main rates to new record lows earlier this month.
"Low profitability is a concern for supervisors because it may impact the medium-term sustainability of some business models," Nouy said. "Certain institutions might struggle to generate capital while having limited access to financial markets." Nouy's hearing was briefly suspended following explosions at Brussels airport, which killed 13 people, and a further blast at a metro station in the Belgian capital shortly afterwards.
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