ECB Gives Banks More Time To Cover Unpaid Loans

European Central Bank, ECB, Loans, Payments, Eurozone

The European Central Bank (ECB) is granting eurozone financial institutions additional time to cover unpaid loans after being pressured by Brussels, Reuters reported on Thursday (Aug. 22). 

Banks will now have three years to cover an unsecured delinquent loan and nine years if the note is backed by real estate. Borrowers with other types of collateral will have seven years to repay.

In finalizing the issue, the ECB’s new chief supervisor Andrea Enria is ending a two-year dispute between Frankfurt and Brussels. Under the new rule, ECB supervisors can set different targets “if the specific circumstances really warrant.”

Eurozone banks have almost halved non-performing loans to 642.5 billion euros ($713 billion) at the end of March, compared with over a trillion in 2015.

Bad loans proliferate, with 41.4 percent of loans in Greece, 21.3 percent in Cyprus, 11.5 percent in Portugal and 8.4 percent in Italy.

“Despite recent progress, the ECB considers it of the utmost importance that the level of NPLs is further reduced, thereby resolving them in a swift manner while economic conditions are still favorable,” the ECB told Reuters.

Eurozone banks are at risk of fragmentation and are turning away from cross-border activity. European Central Bank Vice President Luis de Guindos shared his thoughts on the issue on May 16, saying that with national rules still hindering consolidation across borders, the sector is fragmented — which means lenders can’t compete with larger global peers. It also means banks are forced to rely on their home markets and are tied to their local economies, which creates a “doom loop” between banks and their sovereign countries.

Among potential solutions are creating a European safe asset, a proposal that was put forth by the bloc’s risk watchdog but has not been looked at too closely due to German opposition. One of the options being talked about for a safe asset is a synthetic bond issued by a private investor and backed by the sovereign debt from each member. This would tie the bond to the performance of the debt without the legal burden on the government.