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The European Central Bank is set to rethink its plans to force eurozone lenders to face up to their bad loans after a wave of criticism from EU lawmakers and political leaders who say the proposals overstep the central bank’s authority and have sown confusion.
In an effort to tackle one of the most serious problems affecting the eurozone’s economic health, the ECB’s supervisory wing, the single supervisory mechanism, drafted proposals in October to make it more expensive for banks to hold future non-performing loans.
Insiders also hinted that similar guidance could be applied to a stock of almost €800bn in bad loans left over from the financial crisis.
The proposals were put out for consultation, which ends on Thursday.
But while there is broad agreement in Frankfurt and Brussels that bad loans are hampering the region’s recovery, the ECB’s plan has run into trouble with the European Parliament and the Council of the EU, with supervisors now having to accept they must amend the proposals.
Lawyers for both say the proposals exceed the SSM mandate. The key area of concern is whether they would be legally binding on all banks. The ECB has no power to issue broad rules applying to the entire banking system — that right is reserved for the European Parliament — but it can ask individual banks to strengthen their provisioning beyond the minimum standard set by law.
While the legal opinions are not binding, they indicate the problems the SSM could face if banks challenged the rules in the European Court of Justice.
“The sequence [of events] doesn’t make the ECB look good; there have been different confusing messages, and the legal disputes are not what you would want to see. It’s not the level of watertight professionalism you’d expect from the SSM,” said Nicolas Véron, a senior fellow at Bruegel, a think-tank.
“You could ask why did the ECB bother with the [proposals]. My impression was that they wanted to provide transparency and clarity, but that backfired,” he added.
The proposals require banks to hold more collateral against non-performing loans that emerge after January 2018 — making it more costly for banks to keep the loans on their balance sheets.
[This] doesn’t make the ECB look good; there have been different confusing messages . . . It’s not the level of watertight professionalism you’d expect
They triggered a swift backlash, notably in Rome — a big chunk of Europe’s bad loans are held by Italian banks — where critics included Matteo Renzi, the former prime minister, and Pier Carlo Padoan, the finance minister.
Mr Renzi warned the ECB it ran the risk of triggering a new “credit crisis” if it approved the rules. “Some European officials in the banking sector ignore that their duty is to avoid credit crises, not create them,” he wrote on Twitter shortly after the plans were released. “If these rules pass, credit to small businesses will be impossible.”
The criticism highlights the scale of the task facing the SSM as it grapples with an issue that is not only the most serious facing the region’s lenders but also highly politically charged, especially in economies such as Italy that remain vulnerable to attacks on their banks, many of which have large stocks of sour loans.
“There hasn’t been enough co-ordination with the other [European] institutions and I hope this will now be corrected,” Roberto Gualtieri, a member of the European Parliament who also chairs the parliament’s economic and monetary affairs committee, told the Financial Times. “It’s a problem of a text that has been badly written.”
Danièle Nouy, the SSM’s head, signalled at an appearance before the parliament and at a hearing in Frankfurt last week that she was willing to heed many of the objections.
But the supervisor is unwilling to back down completely. Ms Nouy views the problem of non-performing loans as one that must be solved swiftly, with the region’s economic recovery presenting an opportunity for banks to clean up their balance sheets.
The SSM believes it can reframe the draft proposals — which form an addendum to a series of earlier measures on bad loans — in a way that still allows it to put pressure on banks to deal with the problem.
But a delay in introducing them until after the new year now looks likely and the shape of any measures to deal with existing sour loans less certain.
Andreas Dombret, the board member of Germany’s Bundesbank responsible for banking supervision, has been less diplomatic than the supervisor, rejecting the idea that the ECB overstepped its mandate.
“We have to tackle the reduction of NPLs in a determined and forceful way,” he said. “This is the only thing that matters for us.”
Additional reporting by Olaf Storbeck and Jim Brunsden
This post originally appeared on Financial Times