EU Targets Mountain of Bad Bank Loans in Insolvency Rule Revamp

  • Soured loans’ resilience shows action needed, commission says
  • Proposed rules would facilitate early restructuring of firms

The European Union is taking another crack at easing banks’ bad-loan burden by overhauling insolvency rules as part of an effort to develop the bloc’s capital markets.

“The resilience of nonperforming loans” shows that “further action needs to be taken,” the European Commission, the EU’s executive arm, said in a statement on Tuesday. “Measures to increase the effectiveness of restructuring, insolvency and second-chance frameworks would contribute to a more efficient management of defaulting loans.”

The push to reform insolvency rules across the 28-nation EU is intended to make it easier for struggling companies to restructure early, avoiding bankruptcy and job losses, and to increase payout rates to creditors, the commission said. The measures are also meant to help owners start new companies after bankruptcy by ensuring they’re clear of debt after no more than three years.

The EU’s plan to standardize insolvency laws comes after the European Central Bank ramped up efforts to help euro-area banks get out from under 1.1 trillion euros ($1.2 trillion) of doubtful and nonperforming loans. The ECB said in September that it “expects banks with high levels of NPLs to implement targets for reducing those NPLs that are both realistic and ambitious.”

Insolvency reform is part of the EU’s capital markets union project, which is designed to ease the flow of capital, develop alternatives to bank funding and encourage economic growth and job creation.

“Every year in the EU, 200,000 firms go bankrupt, which results in 1.7 million job losses,” Vera Jourova, the EU’s justice commissioner, said in a statement. “This could often be avoided if we had more efficient insolvency and restructuring procedures.”

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