The European Union should create a publicly-funded asset management company to scoop up some of a trillion euro mountain of bad loans that has become a brake on economic growth, the bloc's banking watchdog said on Monday.
A decade since the start of a financial crisis that forced taxpayers to bail out lenders, the European Banking Authority (EBA) said dealing with so-called non-performing loans or NPLs was "urgent and actionable".
Italian banks account for 276 billion euros ($295 billion) of the bloc's bad loans, by far the largest of any EU banking sector, but 10 EU states have an average bad loan ratio of 10 percent, well above the low single-digit figures seen in the United States and elsewhere.
In a speech in Luxembourg on Monday, EBA Chairman Andrea Enria sketched out how banks could sell some of their bad loans to a new, pan-EU "asset management company" or AMC.
So far, the sale of NPLs has been hampered by the lack of a proper market for bad loans, which has resulted in too low prices for NPLs, discouraging banks from offloading them.
Under the plan, loans would be priced at "real economic value" - an assessed rather than a market price - and the AMC, a concept similar to a "bad bank", would have about three years to sell on the loans at that real economic value.
"If that value sis not achieved, the bank must take the full market price hit," Enria said, adding EU rules on bank resolutions, known as bail-in rules, would apply if state aid was required to recapitalise ailing banks, hitting their creditors.
Support from the public sector would, however, be needed to launch the bad bank and who would pay is not clear yet.
"Some sort of state intervention to help start this process is useful," Enria said, urging the deployment of public resources to create an efficient secondary market for NPLs that could attract private capital.
Klaus Regling, who heads the European Stability Mechanism, the euro zone's bailout fund, welcomed Enria's proposal and confirmed state support would be required.
Regling said the new entity should have a target of acquiring up to 250 billion euros of NPLs from EU banks.
The EBA's plan does not envisage the sharing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recapitalisation were needed, the bill would be footed only by the bank's creditors and the home state of the lender.