Cyprus Mail

ECB issues NPL guideline, asks banks, governments to take more action (updated)

The European Central Bank (ECB) said that it issued a new guidance to euro area banks outlining measures and processes to effectively tackle non-performing loans, and called on governments to assist by adapting “legal and judicial frameworks”.

“The guidance calls on banks to implement realistic and ambitious strategies to work towards a holistic approach regarding the problem of non-performing loans,” the ECB said in a statement on its website dated March 20. “This includes areas such as governance and risk management. For instance, banks should ensure that managers are incentivised to carry out NPL reduction strategies”.

While the ECB does not stipulate quantitative targets to reduce the bad loan portfolio of euro area banks, estimated at €921bn in September, it encourages banks to instead “devise a strategy that could include a range of policy options such as NPL work-out, servicing, and portfolio sales”.

The European Central Bank added that it will apply the “principle of proportionality” in its day-to-day supervisory dialogue with banks in the euro area adjusting “its level of intrusiveness” according to the magnitude and severity of the situation with non-performing loans at each bank.

Banks with elevated non-performing loan problems will soon receive letters containing “qualitative elements” in an attempt to ensure that the action taken by the recipients will match supervisory expectations, the ECB said. “Deliberate and determined action on (non-performing loans) is required but the ECB recognises that reducing high levels of NPLs will take time”.

While the ECB statement does not single out individual banks or member states, it is expected that Cypriot banks are likely to be among the recipients of these letters, which will come on top of the quantitative targets set by the Central Bank of Cyprus for each individual Cypriot bank for the reduction of bad loans. According to the latest figures, the non-performing loan ratio in the Cypriot banking system stood at €23.7bn in December or 47 per cent of the banks’ total loan portfolio.

The ECB guideline comes after an internal European Union document raised fears that the expected cut-back on the ECB’s asset-purchasing programme later this year could lead to a further increase in non-performing loans in the single currency bloc.

Cyprus had to modernise its legal framework on insolvency and foreclosures and introduce legislation allowing the sale of loans as part of its bailout programme. While the new legislation has been in place for more than a year, the pace of bad loans reduction is slow, which may lead to the termination of up to half of the non-performing loans in a couple of years.

The Cyprus Business Mail understands that the government of President Nicos Anastasiades, who is facing re-election next year, is unwilling to propose changes in the foreclosure legislation, especially following last year’s parliamentary election shakeup, which made forming majorities to pass structural reforms more difficult.

“We are looking at it,” a banking source said, in reference to the ECB guideline when contacted for comment.

While the trend of banks resorting to debt-to-asset swaps as part of loan restructuring agreements may help, “banks still need to monetize the assets,” the source continued.

“The cycle of non-performing loan resolution is not completed this way but it is one solution. Other tools available to banks, such as the foreclosure law are somewhat ineffective”.

The drop in non-performing loans by €3.6bn in December, compared to two years before, “may sound high but it is below what we expected,” he added. “There remains a considerable portfolio compared to the economy’s size and it has to do with the magnitude of the problem. There has been deleveraging, households remain over-indebted with their overall debt standing at 127 per cent of gross domestic product, so the reduction of non-performing loans will be a slow process”.

It will take “healthy growth, a healthy increase of wages, and job creation for this to come down,” the source said.

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