The sting arrives, but it is less heavy than expected. L'supervisory body of the ECB illustrated the details of the so-called "Addendum", the surplus of rules that the Central Bank wants to impose on institutions in the Eurozone in relation to the management of new non-performing loans (npl).
The main rules are 2:
- Banks will have 7 years time to set aside sufficient provisions to cover 100% of the Secured npls.
- For the Npl unsecured, however, the time available will be just 2 years.
So far the rules announced last autumn have been confirmed. Compared to that first version of the Addendum, however, there is something new: for guaranteed NPLs, the write-down can start from the third year, for a value equal to 40% of the credit.
In detail, the Central Bank suggests the following progression:
- 40% coverage in the third year;
- 55% the fourth year;
- 70% the fifth year;
- 85% the sixth year;
- 100% the seventh year.
Another very important change is that the new rules will not apply to existing NPLs, nor to those formed since the beginning of 2018, but only to loans that will be classified as non-performing from next April XNUMXst.
The Supervision of the ECB, led by Danièle Nouy, therefore softened the guidelines of the draft presented last October. But the Frankfurt Addendum is still more severe than the rules proposed only yesterday by the European Commission.
It is said that the progress made so far is not enough to find a compromise between the institutions. In fact, a political problem remains open: in July, Ecofin had thoroughly examined the Npl issue, then entrusting the Commission with the task of studying possible amendments to the two EU directives on the capitalization requirements of banks. In Brussels, therefore, the ECB Supervision Addendum is seen as an invasion of the field by technicians in a matter of political competence.
As for the practical consequences of the new rules, five months ago Equita had calculated the squeeze could cost Italian banks up to 1,3 billion euros a year, or about 9 billion of new provisions over the next seven years. Money which, of course, will be subtracted from credit.
Other controversies have to do with the negotiation aspect. Many point out that the expiration dates set for NPL coverage will force banks to sell non-performing loans and to do so with little negotiating weight, to the full advantage of the buyers (primarily the international speculative funds) who will emerge balance prices.
Finally, the Addendum reports the numerous attacks directed in recent years on the ECB Supervision, accused of being inflexible on the problem of NPLs - typical of the European region - and much more lenient on the risks associated with the ocean of toxic derivatives still in the belly of the banks of northern Europe, especially German and French.
In any case, the Central Bank specifies that these are "non-binding" provisions and that the Supervisory Authority "will discuss with the individual banks any deviations from the expectations on prudential provisions indicated in the Addendum". After that, "at the conclusion of the supervisory dialogue, taking into account the specific situation of each bank, will decide case by case, whether and which supervisory measures are appropriate. The results of this dialogue will be integrated, for the first time, in the supervisory review and evaluation process ", the SREP of 2021. In fact, therefore, the ECB leaves the banks four years to reach the required NPL levels.
Not only. In an update of the "questions and answers" section on the issue of the Addendum on the institutional website, the ECB clarifies that "the supervisory expectations defined in the addendum are generic. During the supervisory dialogue account will be taken of specific situations which may determine different levels of risk. For some 'unlikely to pay' banks will be able to produce evidence of regular repayments of a significant portion of the exposure, which may make a 100% provisioning expectation for that particular portfolio or exposure inappropriate.
From Frankfurt they also explain that the Addendum "is complementary to any future EU legislative provision based on the European Commission's proposal to address NPLs in the context of the first pillar, i.e. the mandatory prudential requirements set out in the Capital Requirements Regulation Regulation, CRR). In fact, according to the Fourth Capital Requirements Directive (CRD IV), supervisors must assess and address specific risks at the level of individual credit institutions that are not already covered or adequately covered by Pillar XNUMX requirements”.
