NPLs: European disunion


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Any attempt to deal with Europe’s non-performing loans always seems to end up in a fight.

Europe is finally losing patience with its NPLs. Despite years of talk, 10% of the banks under the European Central Bank’s supervision still have NPL ratios of more than 10%, while €893 billion of NPLs still sit on European bank balance sheets.

The ECB’s surprise announcement in early October that it was to issue addendum guidelines on NPL provisioning triggered an ill-tempered row in Brussels that illustrates just how little tolerance is left at many banks’ persistent failure to deal with the problem.

The ECB, through the Single Supervisory Mechanism (SSM), wants banks to provision for new NPLs that emerge after January 1, 2018 in their entirety. Unsecured loans must be 100% provisioned for after two years and secured loans after seven years of non-performance. That is quite an ‘addendum’ for some banks. And by some we mean, of course, Italian banks.

Discussions about European NPLs are essentially discussions about Italian NPLs. Other jurisdictions with high NPL ratios – most obviously Germany – have been far more successful in masking the problem. 

When the SSM made its announcement, the move prompted an immediate and furious response from the Italian finance minister, Pier Carlo Padoan, who declared that both the method and substance of the communication were doubtful. By announcing the new guidelines as an addendum to existing rules, the SSM has been accused of trying to introduce legislation by the back door, bypassing the European parliament. 

Indeed, the latter swiftly obtained a legal opinion supporting this view. Its eagerness to question the SSM’s procedures might have something to do with the fact that its president, Antonio Tajani, is Italian and is rumoured to be mulling a return to domestic politics after national elections this year. 

The avalanche of criticism prompted Danièle Nouy, chair of the supervisory board at the ECB and head of the SSM, to step back, telling the European parliament that: “When I see so many people saying something different, I can easily draw the conclusion that the drafting can be improved, for sure. And it will be improved. We will, of course, seriously take into account all the good legal advice that we are receiving. It can have consequences.”

So the likelihood is that the new guidelines will quietly disappear for a while to be greatly watered down. 


It is hardly surprising that Italian banks have reacted with such dismay to the new guidelines. During its December capital markets day, UniCredit revealed that it expected them to put a 0.8% dent in its fully loaded common equity tier-1 ratio in 2018 – which is double the 0.4% dent it anticipates from regulation, models and procyclicality combined. 

Giovanni Sabatini, general manager of the Italian Banking Association, pointed out that there was no analysis of the consequences of the new measures or a suitable justification for some of them. 

Although the route by which these measures were introduced is certainly unorthodox, and the reaction of the European parliament entirely predictable, Europe must up the ante in dealing with this problem. 

Nouy, clearly frustrated, has described the pushback as filled with “myths and misinterpretations”. Europe’s NPL problem has been chewed over for so long, and proposed initiatives, such as a pan-regional bad bank, do not seem to be going anywhere. 

But even the ECB’s controversial new plans, applying as they do only to new NPLs and on a case-by-case basis, still look like fiddling while Rome burns.