In late 2017, the ECB surprised central bank watchers, briefly spooked markets, and angered many Italians, with its plan to eradicate what many have dubbed the “ticking time-bomb” at the heart of the Eurozone, namely the roughly $1 trillion in non-performing loans across European banks (a number which is materially higher in reality as Euro banks were recently caught misrepresenting it).
The ECB then quickly came under fire – mostly from Italy whose banks have the biggest notional amount of bad loans – for demanding that banks set aside far more capital as loss buffer for when the €900 billion in bad loans are ultimately discharged.
Fast forward six months when it now appears that the European central bank came, saw… and ran away when faced with what now appears to be an certifiably insurmountable problem: as Reuters reported this morning, the ECB “is considering shelving planned rules that would have forced banks to set aside more money against their stock of unpaid loans, after suffering a political backlash.”
The NPL guidelines, which were already delayed by a month, and were expected by March, were pitched as a key anchor of the ECB’s plan to bring down the $930 billion pile of non-performing credit that has crippled eurozone banks for the past decade, particularly those in Greece, Cyprus, Portugal and Italy.
Instead, the ECB is now planning to tactically surrender as there NPL problem has proven too massive for banks to be able to officially address it, or as Reuters put its far more politically, “the ECB was now considering whether further policies on legacy non-performing loans were necessary depending on the progress made by individual banks.” Of course, since there has barely been any progress in resolving this issue, the conclusion is simple: the ECB is no longer pushing for an NPL resolution, as there simply isn’t a viable one.
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