The project, which comes as Europe mobilizes thousands of billions of euros to support the region’s economy, aims to protect commercial banks from any second fallout from the crisis, if rising unemployment stifles necessary income repayment of loans.
One of the people familiar with the plan said that the ECB had set up a task force to examine the idea of a “bad bank” to store unpaid euro debt and that the work on the plan has been accelerating in recent weeks.
The ECB refused to say whether it was working on a bad banking system.
According to official statistics, the amount of debt in the euro area, considered unlikely to be fully repaid, already amounts to more than half a trillion euros, including credit cards, loans automobiles and mortgages.
This is expected to increase as the COVID-19 epidemic presses borrowers and could even double to $ 1 trillion, weighing on already fragile banks and hampering new loans, people familiar with the plans said. BCE.
While the idea of a bad bank in the euro area was discussed and put aside more than two years ago, the ECB, under the leadership of its new president Christine Lagarde, consulted the banks and officials of the EU about a program in recent weeks, said one of the people.
As the most powerful institution in the eurozone, ECB support for the project is essential, but it would also require the blessing of Germany, the bloc’s largest economy.
Berlin has long opposed plans that accept shared responsibility for debts in other countries, although it has recently changed its mind, agreeing to pool EU loans for a recovery fund coronavirus.
A plan under discussion would involve the European Stability Mechanism, an EU institution that can provide financial assistance to eurozone countries or lenders, as the guarantor of the bad bank, people said.
The bad bank would then issue bonds that commercial banks would buy in exchange for unpaid loan portfolios, neutralizing the viral shock for European lenders. Banks could then deposit these bonds with the ECB as collateral for central bank funding, one of the people said.
Large European commercial banks could be called upon to join forces to support the program, said the second person.
As European countries now focus on launching a € 750 billion plan to help the economies hit by COVID-19, the idea of a bad bank and the ECB master plan could do the trick. subject of discussions between governors and ministers of central banks later this year.
Asked about bad banks on Tuesday, Andrea Enria, the ECB’s chief banking supervisor, said he supported the concept, but it was “premature” to discuss it now because it was not clear how much the impact of the coronavirus epidemic would be serious.
“I have been very supportive of asset management companies. I think they are useful, “he told reporters, noting the success of bad banks in Spain and Ireland in the aftermath of the financial crisis. “Many of these plans ended up in the dark, making a profit. ”
Enria said the ECB is studying how banks could cope with a worsening of the crisis. He said banks have more than $ 600 billion ($ 680 billion) in capital, which would likely be enough, unless there is a second wave of infections.
However, any pan-European program to tackle the problem of bad debts would likely meet with political objections from Germany, which has long resisted attempts to support banks in the weakest countries, for fear that she doesn’t end up with unpaid invoices.
Markus Ferber, German member of the European Parliament, said that Berlin remained opposed to the taking of such mutual guarantees. “Bad domestic banks could be the first step,” he said.
Marco Zanni, an Italian legislator in the Parliament, said that the EU’s decision-making process was too complicated and too slow.
“In the light of past crises, experience has shown that European solutions come too late,” he said. “When you face a crisis… you have to act in days or weeks, not months or years. ”
Italian and Greek banks, for example, were still recovering from the aftermath of the financial crisis more than a decade earlier, when the pandemic broke out.
But while the problem of unpaid loans has been concentrated mainly in the poorest countries of the EU since the crash of 2008, the widespread impact of the coronavirus, which has hit Germany hard, could see borrowers everywhere struggling.
The European Commission, the EU’s executive body, said it had explained how bad banking mechanisms could work, but that no “formal work” was underway. He said the banks had benefited from more regulatory latitude but could “explore all relevant possibilities” if necessary.
“European banks are already preparing for a new wave of bad debts,” said Andrew Orr of Deloitte accounting firm.
“Having a bad European bank would help. Nothing changes for bad debt itself. The debts have yet to be settled and the money has yet to be repaid. “
Written by John O’Donnell; Editing by David Clarke
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