MNI POLICY: Smaller Eurozone Banks Still Making Risky Loans

By Luke Heighton

     FRANKFURT(MNI) - Smaller Italian, Portuguese and Spanish banks with high

levels of non-performing loans (NPL) have not restrict their lending to risky

borrowers despite increased ECB supervision across the euro zone, it was claimed

on Monday.

     Locally-regulated, distressed-area banks with assets of less than Eur30

billion are less likely to moderate their lending behaviour than larger,

centrally-regulated banks, despite the presence of large quantities of NPLs on

their balance sheets, economist Jose-Luis Peydro said, in a research paper

presented at a conference at the European Central Bank.

     There was also evidence that the easing of monetary conditions since the

creation of the ECB's asset purchasing program and the introduction of low

interest rates had increased risk appetite among banks subject to only local

oversight, Peydro added.

     Banks directly supervised by the ECB, whether in stressed or non-stressed

areas, were less likely to engage in risky lending practices, he told an

audience in Frankfurt.

     But a comparison of the three smallest banks regulated by the ECB with

those of the three largest banks who weren't also found little difference in

their high-risk lending habits, he added.

     Overall, the existence of NPLs on banks' books was shown to increase rather

than reduce the credit supply to risky borrowers in both stressed and

non-stressed economies, the study found.

     The effect was more clearly observable in Italy, Spain and Portugal than

Germany and France, while the loan portfolios of stressed-area lenders were also

less diversified. But the lack of a harmonized European register of loans also

made direct risk comparisons between countries more difficult, the study's

authors said.

     The claims were made in a research paper on banking supervision, monetary

policy and risk-taking, using data evidence gathered from 15 national credit

registers between June 2012 and December 2017.

     The report, which represented the views of the authors, not the European

Central Bank, was written by Peydro of the Universitat Pompeu Fabra, Spain, and

the ECB's Carlo Altavilla, Miguel Boucinha and Frank Smets

[TOPICS: M$X$$$]