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NPLs: European disunion

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 wasto 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.

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