A European Union bad bank would go a long way toward reducing the 1.2 trillion-euro ($1.3 trillion) mountain of soured loans on lendersâ€™ books, but that relief may be a long time coming, according to the blocâ€™s bank regulator.
Andrea Enria, chairman of the European Banking Authority (EBA), proposed setting up a bloc-wide asset-management company to take over and manage the sell-off of the loans. The regulatorâ€™s executive director, Adam Farkas, said last week that a â€œrealistic aim could be to move about a quarterâ€ of all bad loans off banksâ€™ balance sheets.
That would be a boon to banks such as Banca Monte dei Paschi di Siena SpA that are drowning in nonperforming loans. Yet creating any new EU entity would be a long, hard slog, Farkas said, beginning with policy debates in Brussels. If a bloc-wide bad bank proves impracticable, a network of national companies would still be a big improvement, he said.
The most ambitious option â€œwould possibly be the most impactful for a number of reasons, but if that is not achievable, the important thing is that a step forward is made,â€ Farkas said in an interview in London. â€œWhat we are arguing is that action is needed. We need to move.â€
The European Central Bank has ramped up efforts to help euro-area banks reduce their stock of doubtful and nonperforming loans, instructing banks to set â€œrealistic and ambitiousâ€ targets. The European Commission, the EUâ€™s executive arm, has also taken a crack at easing the burden by overhauling insolvency rules as part of developing the blocâ€™s capital markets.
Enriaâ€™s proposal has gathered heavyweight support from Klaus Regling, managing director of the European Stability Mechanism, and Vitor Constancio, vice president of the ECB. Yet even advocates of the plan acknowledge the difficulties theyâ€™ll face in putting it into action.
An EU asset-management company would be welcome, â€œparticularly because it would facilitate raising private funding in the market,â€ Constancio said on February 3. â€œA true European AMC faces, however, difficulties in the present
One hurdle the initiative could face is opposition from Germany and other countries to risk-pooling, an objection that has stalled another pan-EU project, a common deposit insurance system. Farkas said the EBAâ€™s plan gets around this concern.
The bad bank would be capitalized sufficiently to issue debt at market rates to fund its operations, Farkas said. Banks would transfer bad loans to the asset-management company, which would have a deadline for selling them on. If the sale price were below the transfer price, or the loans couldnâ€™t be shifted in time, the company could claw back losses from the bank.
â€œThere is no risk-sharing of the losses,â€ Farkas said. â€œThe only sharing is the capital which is provided, if itâ€™s European money.â€
If a bank were unable to absorb the losses, it would become the problem of the relevant national government, not of the EU asset-management company. â€œThis would not necessarily be a for-profit enterprise, but it would not be there to suffer losses,â€ Farkas said. â€œThe capital would be there in order to allow the AMC to borrow under market terms.â€
Germany may take some convincing on this point. Frankfurter Allgemeine Zeitung, one of the countryâ€™s leading newspapers, provided a taste of what may come in an op-ed this week, arguing that the proposal would make German depositors â€œliable for ailing banks in southern Europe against their will.â€
A host of issues remain to be discussed on how the fund would operate and even how it could be created under EU law, Farkas said. And thatâ€™s all the more reason to get started.
The EBAâ€™s goal is to â€œinduce a more detailed debate on thisâ€ and
â€œincrease the momentum,â€ he said.