Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Defending the Euro Starts With Cleaning Up the Banks

Posted by hkarner - 1. März 2017

Date: 28-02-2017
Source: The Wall Street Journal

Why European bad loans are more than just an economic burden

The European Central Bank is preparing to give eurozone lenders final guidance  on how to manage bad loans.

Fix Europe’s bad debts and you can start fixing Europe.

That is the bigger imperative as the European Central Bank gets set finally to push the Continent’s lenders to clean up their combined €1 trillion bad-debt pile.

Across the EU, bad debts average more than 5% of total loans, according to the European Banking Authority, which is almost three times the level of the U.S. or Japan, according to World Bank data. In some countries, they threaten financial stability: Italy, with more than €200 billion of duff loans, is the well-known standout.

npls-as-of-all-loansIn the spring, the ECB’s regulatory arm will issue final guidance to banks on how to manage bad loans. That will kick off a round of intensive talks to agree to individual commitments from the worst banks on ambitious targets for cutting bad-debt ratios.

If banks don’t get on with the job, the ECB’s regulatory arm can force them to raise more capital through their annual supervisory review. A cleanup will be painful, but ultimately will help bank stocks that are weighed down by investor worries about losses to come.

Everyone knows bad loans cause an economic drag: Investors trust banks less and so their cost of funding and equity is higher; it also means bank capital is tied up in zombie companies, blocking new lending that could help growth.

But this isn’t the only reason the ECB has said that “extend and pretend” can’t continue. Cleaning up the banks is a prerequisite for more important planks of European unity. No eurozone government will share risks across borders until it can be sure it won’t instantly be asked to pony up money for a bank cleanup in another country. That stands in the way of a eurozone-wide deposit insurance program or a bigger resolution fund to help manage banks through failure, both of which are missing bedrocks for the eurozone.

Until the problem of risk sharing is solved, there will never be a full banking union in which deposits and loans are just as naturally made across borders as within nations. As ECB board member Peter Praet put it in January, the eurozone isn’t even a true single-currency area until all forms of money, including bank deposits, are as good in one country as in another—as they are between U.S. states.

As with much else, the regulation is European, but the consequences of failure are still national. Getting Europe’s loans cleaned up is the next step to bridging those divides.

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