In response to mounting bad debt in the sector, the European Central Bank (ECB) will ask eurozone banks to put more cash aside to cover bad bank loans, according to a report in Reuters — and could request more measures to protect against it in the future.
The bad loans are hurting banks' balance sheets, resulting in them holding back in lending. This, in turn, is offsetting the low interest rate stimulus by the ECB. Reuters reported that as of Jan. 1, 2018, banks will have two years to put aside funds to cover 100 percent of newly classified nonperforming unsecured debt. They have seven years to set aside money to cover all secured bad debt.
“In addition, by the end of the first quarter of 2018, ECB Banking Supervision will present its consideration of further policies to address the existing stock of [nonperforming loans] NPLs, including appropriate transitional arrangements,” the ECB said in a statement.
The report noted that European banks have close to 1 trillion euros worth of bad loans, with lenders in Italy, Greece, Spain and Cyprus feeling the most pain. Whether the loan is partially secured or partially unsecured will require a different timetable for covering the bad debt, the ECB said, according to Reuters.
“Furthermore, banks are expected to explain any deviation from the guidance to supervisors,” the ECB said. “Based on the banks’ explanations, the ECB will assess the need for additional supervisory measures.”
The ECB plans to have public consultation on the new proposals until Dec 8.
Back in July, research from Bibby Financial Services suggested bad debt for small and medium-sized businesses (SMBs) in the U.K. was on the rise. At the time, it said the average level of bad debt among SMBs in the country spiked by 70 percent in a single year, according to a survey of 1,000 small businesses.
The value of bad debt, on average, now stands at $26,230 written off as unrecoverable. Nearly one-third of small businesses surveyed said government efforts to lower business rates would be a help in easing financial burdens, Bibby Financial Services found. Researchers noted SMBs are calling for government support as the spring budget — including a business rates relief fund — has yet to come into effect.