ECB preparing a new grip on banks, April comes with new NPL regulations

The story of the relations between Italy and the EU is rich in episodes linked by a red string: Bruxelles or Frankfurt introduces apparently technical-looking measures noted in Italy by a small team of specialists, but then the rest of the country realizes that the adjustment triggers waves of transformations in the economy and businesses. At that point interests hindered by the new decision are on the lookout to lead the revolt in the name of “sovereignty”, which delays and makes all the more expensive the adequation, in the end revealed unavoidable.

It’s happened a number of times ever since Maastricht, and it can happen again. Not before the elections but right after: at mid-March the announcements and from April on the new regulations of the rules on credit will impose, like a waterfall, changes in the efficiency of civil justice and in the structure of SMEs that represent today 95% of the Italian economy; these last, if the balance is fragile, will find ever more difficult, to obtain without guarantee, banking credit to be used as liquidity in the day-to-day.

Most of what’s coming was already pointed out at Bruxelles and Frankfurt. If the European agenda doesn’t change, on March 13th, the Commission and on March 14th the ECB will issue new proposals and decisions on banks and the way of digesting and reduce default credits. For both institutions the way is paved. The commission will keep following an agreement between the European financial experts: for “Pillar 1” (base capital for the banks) the banks place a lot more capital in case of eventual problems in the reimbursement of new credits to be granted from 2018 on. The ECB goes a step beyond: it will indicate that for “Pillar 2” (the extra amount demanded by regulators to each bank) that provisions have to be way higher regarding the  defaults from April 1st onwards, and then the credit reimbursements granted in the past. It is then the incentive of the entities to recognize within 5 weeks both distressed and default positions. On the distressed loans without guarantee, from April onwards, the banks will have to constitute within two years capital reserves for 100% of the payments; instead on the loans covered by guarantees, always in case of late payments or defaults from the clients, the bank will have to provision the total sum within 7 years: each year gradually in a proportional way. Even if a property collateral to a credit covers half of its value, its value will be considered zero.

That is not just a technical argument. Soon these measures will hit the judiciary system and the SMEs, as Maastricht did on public accounts: forcing times on a needed but not painless change. Mediobanca Securities estimates that, until 2020, the ECB´s initiative may erode 0.10% to 0.15% a year the capital of the banks. The grip on the credit may also hinder growth by 0.2% a year. The banks, indeed, will be way more reluctant to loan to SMEs that does not come forward with guarantees, knowing that in case of the slightest problem they’ll have to null half of the credit and the rest, the year after. A civil justice will be completely overwhelmed, as it already takes 1,100 days to execute a property collateral to a defaulted loan. Whatever the judgment on the ways of this change, that is going to happen. And also in Maastricht times, the politicians failed to realize the consequences.

Source: Corriere della Sera (Federico Fubini). Translation by Miguel Vinuesa.

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