Europe's banking authority yesterday proposed creating a new pan-European vehicle that would collect bad credit and sell it. The idea was prompted by the poor health of many banks that continues to weigh on Europe's economic recovery, and as Italy prepares a restructuring plan for Monte dei Paschi di Siena to gain approval for the state's recapitalizing the word's oldest bank.
At a seminar in Luxembourg organized by the European Stability Mechanism (ESM), the chairman of the European Banking Authority (EBA), Andrea Enria, brought up the possibility of a financial vehicle — a European Asset Management Company, a kind of “bad bank” — that would be called on to manage bad credit.
Financed mainly with private funds, the new company would buy bad loans at market value and sell it for the same.
“If the nominal value isn't obtained,” said Enria, “the bank will have to take the market price,” with a likely significant loss. It would have to sell the assets in three years.
In his presentation, the central banker noted that the difference between the economic value and the market price would have a role in helping the state in a theoretical preemptive recapitalization. If sales don't materialize, the state would intervene.
The EBA proposal comes as Europe struggles to find an efficient solution to resolve the question of deteriorated credit that weighs on bank balance sheet and economic recovery.
Speaking to Euro-zone finance ministers last Thursday here in Brussels, the IMF stressed how slow the process of eliminating bad debt has been for European banks. The IMF noted that the amount of bad debt had fallen €150 billion over two years.
In his presentation yesterday, Enria wanted to emphasize the fact that his proposal doesn't foresee any pooling of risk because, if a certain operation of acquisition and sale doesn't succeed, the nation of reference will be the one to recapitalize the bank in question. And shareholders of the bank would take a hit if the value of transferring the bad loans is lower than the book value carried by the bank.
During the seminar, the EBA proposal had the support of Klaus Regling, managing director of the ESM (European Stability Mechanism), who, among other things, stressed this point - that there was no pooling of risk. He said that is “politically an advantage” since the issue of financial responsibility is a controversial one.
Regling, like Enria, singled out the issues to resolve: who will be in charge of the financial vehicle; its financing; and the role of governments. Regling anticipates the new entity will issue debt to finance its acquisition of securities (valued at €200-€250 billion).
“A role for the public sector is probably necessary,” he acknowledged.
The Commission noted that the question of bad loans is still a “significant challenge.” Despite impressive progress, “We are looking at additional possible approaches,” said spokeswoman Vanessa Mock.
Enria's proposal comes as Italy is preparing a restructuring plan for MPS to allow the state to recapitalize the bank. As with other European banks, MPS is drowning in bad credit. In his presentation, the head of the EBA pointed out that Italy has a share of bad credit to total credit of 16.4% — one of the highest percentages in Europe. Without considering any additional provisions, bad loans come to €276 billion.
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