EU Banks will get up to nine years to provision defaulted debt

Member states of the EU and the Parliament today reached an agreement on how the banks of the union have to cover defaulted debt. The agreement is here nine months after the European Commission published its proposal to unify regulations on the NPL ratio, one of the pillars of the banking union. The proposal must still be approved in session by the European Parliament.
Today’s agreement sets a schedule to provision defaulted loans, according to which the unsecured loans will have to be provisioned to 100% after three years in default, says the press release sent by the European Parliament.

For the secured loans, two different schedules have been set, according to the type of assets. Loans secured by Real Estate will have to be provisioned to 100% nine years after being defaulted; when the guarantee is of another type, seven years.

In both cases, during the first two years, no guarantee will be demanded. On the third year, the loan will be provisioned to 25%, the next to 35% and the fifth to 55%. From then on, the provision calendar is more convenient for loans secured by real estate, that have four more years, while the rest only have two years.The European Commission’s Vice President, Valdis Dombrovskis, has said “today’s agreement guarantees that banks will have less default in their balance sheets, which will increase their solidity and allow financing businesses. I count now on Parliament and Council to agree on the proposals on development of a secondary market of defaulted debt”.

MEPs Esther de Lange (PPE) and Roberto Gualtieri (Social Democrats) also welcomed the agreement. Agreed on measures are similar to the non-binding guidelines on default rates approved in March by the ECB, that also set schedules. In the case of the ECB’s proposal, the time was set between two and seven years for unsecured and secured loans; the Commision was proposing between two and eight. The final agreement is a little more generous, offering between three and nine years.

The need to set a common provision calendar rose a few eyebrows in the EU, especially due to the reluctance of the Italian government that managed to postpone its launch by the ECB in November 2017 of a binding proposal. The Italian banks’ stock prices skyrocketed. The new agreement comes as Brussels is negotiating with Rome the Italian Budget for 2019. Today, Commissar Pierre Moscovici said that the EU is “working day and night” to avoid sanctions to Italy.

Source: Cinco Días. Translation by Miguel Vinuesa Magnet / Cathal Logue.

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