MNI: ECB NPL Rules Help Avert Fin System Risk - Italy Official

By Silvia Marchetti

     ROME (MNI) - The European Central Bank's new banking rules on bad loans are

a "good compromise" and will help avoid systemic risk in financial markets, a

senior Italian government official told MNI.

     "We are quite satisfied with the outcome as the new guidelines, not binding

and much softer compared to the initial proposals, avert the risk of pushing

lenders to rapidly get rid of their bad loans, thus triggering a potential

financial systemic crisis which was our greatest concern," said the source.

     Such a risk had been repeatedly highlighted in recent months both by the

Italian Treasury and the Bank of Italy, the official recalled, expressing

satisfaction that Ital's 'gentle' arguments had perhaps been taken into

consideration.

     The danger, had the bad loans rules been tougher, compulsory and

immediately applicable to all banks, would have been the fire sale of massive

volumes of non-performing loans at prices below market levels in order to clean

their balance sheets overnight, argued the official. That would have had

negative repercussions on lenders' capital and profitability.

     --STILL NEED NPL MARKETPLACE

     The official noted that market operators and public authorities have pooled

efforts in recent years to create a specific market for NPLs (unsuccessfully to

date in Italy) where bad loans could be sold at market prices in order to

incentivize banks into disposal.

     "If banks are forced to sell their NPLs quickly at prices below market

levels, they would gain no profit at all in the operation and would therefore

step back, preferring to keep those bad loans after all," he argued.

     The time frame and greater leeway envisaged in the adoption of the new ECB

addendum rules will now allow banks time to gradually adapt to the new scheme.

     "The fact that the new regulation applies just to new bad loans issued from

April onwards, that it is not mandatory, and takes into account each bank

separately from its role within the financial system is, we think, a positive

result," added the source. "We're satisfied that the new guidelines consider

banks individually, and allows each lender the discretion to abide to the new

framework or not, or to do so according to specific needs case by case".

     Bad loans need be reduced but if their disposal is too speedy this could

harm banks and by extension the whole financial sector, stressed the official,

noting how enormous efforts had already been made in curbing the volume of

non-performing loans sitting on banks' balance sheets.

     According to recent Bank of Italy data, the total stock of NPLs, net of

loan loss provisions, has fallen from a peak of E200 billion in 2015 to E140

billion currently.

     --NO BRUSSELS/FRANKFURT CLASH

     The official ruled out any "conflict of competences" between the ECB and

the European Commission, who last week published a parallel proposal on bad

loans.

     "The two (ECB and EC) are complementary. Brussels has made a proposal of a

new bad loans scheme, it is up to the European Parliament to legislate on the

matter together with European Council once the proposal is evaluated. But the

ECB is in charge of Europe's single supervision (mechanism)".

     Rome will give an official opinion on the commission's plan only once it

becomes effective and its impact on banks -- be it good or bad -- has actually

been weighed up.

     However, the official said that going forward, the ECB should be careful to

not of overstep its mandate. "The European Parliament has more than once warned

the central bank not to be over-active in certain areas and to also take into

account the scope of Brussels' financial legislative powers," he said.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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