Under pressure from the pandemic’s second wave, which brings the unfavorable forecasts for bad loans closer, Brussels is overcoming its reservations about bad banks and now includes state asset management companies in its strategic planning for the protection of the financial system in order to keep businesses and households supplied with fresh liquidity.
The European Commission is expected to unveil next week its strategic plan for the establishment of bad banks at the national level, as revealed yesterday, speaking to reporters, the European Commissioner for Financial Stability, Financial Services and the Capital Market Union, Mairead McGuiness.
As she noted, this plan will create the framework for countries to create bad banks, to ensure that European banks continue lending.
According to the Irish commissioner, a drop in lending is possible if credit losses for banks increase due to pressures the European economy is facing from the new restrictive measures to deal with the second wave of the pandemic.
"If we do not do something, if we leave the non-performing loans on bank balance sheets, then the provision of credit to the real economy will really be cut off. That is why we must act, we must prepare for this eventuality," said McGuiness.
In fact, the commissioner referred to risks posed to some European banks resulting from a legacy of non-performing loans and the creation of new ones due to the pandemic, as in the case of Greece. As she put it, "what can raise concerns is that there is a problem of non-performing loans that banks inherited from the debt crisis of the last decade and add to this the problems created by the pandemic crisis."
She was quick to point out that the preparations do not mean that the Commission predicts things will turn out really badly, "but we expect there will be some problems and we want to try to deal with them in advance." The creation of bad banks that will be created by the governments, as she said, will be done in order to avoid a recurrence of what happened after the European debt crisis, when the opportunistic funds took the non-performing loans.
Since the summer, the Single Supervisory Mechanism (SSM) of the ECB has assessed that there is a risk of non-performing loans in the eurozone reaching 1.4 trillion euros, in a bad case scenario, well above the highest level they had reached during the previous crisis. Andrea Enria, head of the SSM, has repeatedly stressed that the problem of non-performing loans with national bad banks should be addressed, which could create a network and raise funding from the European Stability Mechanism.
The apparent convergence of the Commission with the SSM seems to allow for the establishment of bad banks without raising issues concerning state aid being provided, something that was suggested in a recent article in Germany’s Handelsblatt by Bank of Greece governor, Yiannis Stournaras . As he stressed, "in exceptional circumstances, I am in favor of a more flexible application of state aid rules. The creation of Asset Management Companies, backed by the state and in exchange for a suitable commission, should be recognized as a reliable solution for dealing with asset quality problems.”
In September, the Bank of Greece submitted to the government a detailed plan for the establishment of an asset management company, which provides not only for the transfer of NPLs left behind by the Hercules plan, but also deals with the transfer of deferred tax credits (DTC), in order to improve the quality of capital held by Greek lenders.
European Institutions and the International Monetary Fund have stressed that this proposal should be seriously considered by the government, as the "Hercules" plan is considered insufficient for the consolidation of bank balance sheets.
As Stournaras recently pointed out, non-performing loans amounted to about 60 billion euros or 36% of total loans, in the first half of the year when the corresponding index in the rest of the eurozone was around 2.6%.
The crisis triggered by the pandemic, Stournaras predicted, will lead to the creation of a new generation of non-performing loans, which the BoG estimates will be at about 8 to 10 billion euros. He stressed, however, that reliable estimates could not yet be made as visibility had not been restored. Stournaras added that loans of more than 20 billion euros, corresponding to 20% of the up-to-date loans or 12.5% of the total loans, have been put by the banks in a suspension regime.