Banca Monte dei Paschi di Siena : ECB’s new provision rules may cover all bad debt, not just newly soured loans – source

All banks supervised by the European Central Bank (ECB) will be given a target date to fully provision for their bad debt in line with how they must treat newly soured loans, a source familiar with the situation said on Tuesday.

The medium term date may differ from bank to bank and will be an expectation rather than a binding requirement, the source added.

The ECB’s move, which has surprised some investors, has spooked Italian lenders who held a gross 159 billion euros worth of non-performing loans at the end of June accounting for 9.7 percent of all their loans.

Italian banks have struggled for years to clean up their balance sheets.

Shares in Italy’s bank sector fell 3 percent on Tuesday versus a 0.7 percent fall in the broader index of lenders.

The ECB last year said it would give banks 7 years to fully provision for newly soured secured debt and 2 years for unsecured debt.

But it did not put a numerical target on all bad loans, which totalled 657 billion euros in mid-2018.

If the same criteria are applied, banks would be given at most until 2026 to write off their stock of bad debt, which have weighed on their balance sheets since the bloc’s debt crisis.

While banks expected stringent requirements, many hoped the ECB would not specify a date and would instead opt for a more vague formulation, giving banks increased leeway.

Italian lenders supervised by the ECB would have to write off another 72 billion euros of bad loans to increase provisioning to 100 percent, Reuters calculations based on third-quarter results show.

While the expectations are not binding, the ECB has made it clear in the past that the bar for deviating from them is high and unsatisfactory explanations could be met with more binding requirements.

The ECB declined to comment.

Troubled lender Monte dei Paschi di Siena said it was told to increase coverage for impaired loans by 2026, sending its shares down by more than 10 percent.

The ECB last year said the expectations will be based on a benchmarking of comparable banks and guided by individual banks’ current NPL ratio and financial characteristics.
Source: Reuters (Reporting by Francesca Landini; editing by Kim Coghill and Jason Neely)