According to a recent Reuters report, the ECB plans to ask banks to keep more cash provisions against future bad loans. Specifically, based on the draft proposal seen by Reuters, for any loan categorized as NPE after Jan 1st 2018, the ECB would request banks to raise provisions coverage to 100% within two years for unsecured debt and within seven years for secured debt. The application of the rule should not result in cliff-edge effects and will be implemented in a gradual manner by banks from the moment a loan is classified as NPE, according to the draft document.
In addition, the rationale behind the demand for full coverage of secured debt is that a bank needs to realize its collateral in a ‘timely manner’ otherwise the collateral is deemed ineffective and the exposure treated as unsecured. The guidelines, which are expected to be published by the ECB, will be non-binding but any deviations should be explained by lenders.
Through these guidelines the ECB aims to prevent the accumulation of NPEs in the future and make banks more active when it comes to dealing with their bad debts, as keeping them on balance sheet would become prohibitively expensive. Taking into account that these new guidelines should be applied to any future NPEs, there is no imminent impact on Greek banks. Assuming banks are able to reduce their NPEs as planned, any future impact should be limited.
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Source: en.capital.gr
