ECB urges banks to clean up before next crisis

Eurozone banks have made progress since the financial crisis, but must do more to put their houses in order during economic good times, European Central Bank (ECB) watchdogs said Wednesday. "Certain banks must do more. In particular, they must clean up their balance sheets," chief ECB supervisor Daniele Nouy told reporters in Frankfurt.
Top of the watchdogs' list is a 760-billion-euro ($940 billion) mass of bad loans that was still weighing on banks' balance sheets in the third quarter of 2017, a figure that had fallen by 200 billion over two years. So-called non-performing loans (NPLs) - on which borrowers have failed to keep up with repayments - "drag down profits, they divert resources that could be put to more productive use, and they keep banks from financing the real economy," Nouy said.
"Banks should use the good times to reduce NPLs... once a downturn sets in, it will become much harder," she added. For its part, the ECB will lay out more clearly how it expects banks to set aside cash to cover the risks of future bad loans in an update to its guidance. With the banking sector more robust, plans to establish a eurozone-wide deposit insurance scheme known as EDIS could advance "a step further", Nouy continued.
The European Commission in Brussels is keen to push forward with the scheme, but governments and lenders in wealthier, more stable countries like Germany and the Netherlands fear they will end up on the hook for upsets in nations like Italy or Greece with higher debt levels. Meanwhile, the ECB's deputy banking supervision chief Sabine Lautenschlaeger warned that banks "must continue to prepare for any outcome, including a hard Brexit" if talks between London and Brussels on Britain's departure from the EU fail to reach an agreement.
Uncertainty still looms large over whether London-based lenders will retain their privileged access to EU markets after Britain leaves next year. Eight have already submitted applications for a eurozone banking license while four others will "significantly extend their activities in the euro area," Lautenschlaeger said.
Any remaining banks must present their plans at the very latest by June, she added. "We won't tolerate any empty shells," Lautenschlaeger said, reiterating supervisors' longstanding insistence that "banks need to establish sufficient local capabilities in areas such as pricing, trading, hedging and risk management" if they move onto the Continent.