Constancio Sees State Role to Tackle Bad-Loan Quandary

  • ECB Vice President calls for ‘reflection’ amid market failures
  • Without EU support, supervisors will set pace of NPL workout

European Central Bank Vice President Vitor Constancio said policy makers should consider allowing “small public support” for banks weighed down by crisis-era soured loans to improve financial stability.

“The present situation, after a new round of reduced stock prices following Brexit, deserves a deep reflection about the offsetting of some market failures with a small public support to markedly improve the stability of some banking sectors,” Constancio said in a speech in Madrid on Thursday. “Without this approach, the only solution available will be for supervisors to impose time limits for writing-off NPLs which realistically will then take several years to reach reasonable levels.”

His comments come amid fraught talks between the European Commission and Italy over Italy’s plan for a precautionary recapitalization of Banca Monte dei Paschi di Siena SpA and other banks. European Union rules forbidding state aid and prescribing the bail-in of junior debt make it difficult to inject fresh funds in lenders that are under pressure from supervisors to work off bad loans.

Asked about the troubles of the Italian banking sector, Constancio said it is well known that the nation has one of the highest levels of non-performing loans in Europe.

‘Comprehensive Strategy’

“The resolution of the large post-crisis NPL overhang in Europe requires a comprehensive strategy involving coordination among all relevant stakeholders,” Constancio said. “Banks with high levels of NPLs, with or without any European policy support, will have to steeply improve their workout capacity to deal with the problem.”

With about 360 billion euros ($399 billion) in soured loans saddling Italian banks, the Italian government has been sounding out regulators on ways to shore up lenders bruised by a renewed selloff after the British vote to leave the EU.

Constancio said all EU members must enact the Bank Recovery and Resolution Direction, which sets out rules for saving or shuttering lenders. “The BRRD has to be applied,” he said in response to questions after his address. “Any solution must be found within the terms of the BRRD.”

Monte Paschi’s stock has lost 78 percent this year compared with a 35 percent decline in the STOXX Europe 600 Banks Price Index. The lender has lost 99 percent of its market value since the collapse of Lehman Brothers Holdings Inc. in 2008.

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