Why Policy Makers Want the EU to Create a Bad Bank

  • EBA Chairman Enria makes proposal in Luxembourg presentation
  • ESM chief says plan would mean transferring millions of loans

Andrea Enria, chairman of the European Banking Authority.

Photographer: Anthony Kwan/Bloomberg

The European Union should create a bloc-wide bad bank to help tackle the 1.2 trillion euros ($1.3 trillion) of soured loans on lenders’ books, policy makers said.

Andrea Enria, chairman of the European Banking Authority, proposed setting up a common asset management company to take over and manage the sell-off of the loans. The bad bank would bridge the gap between the “real economic value” of banks’ bad loans and the price that investors are willing to pay. The new entity would pay the seller the transfer price and seek to realize it, and would be entitled to claw back the difference if it failed to do so.

Klaus Regling, managing director of the European Stability Mechanism, said the target is to move as much as 250 billion euros ($267 billion) of non-performing loans to the bad bank. “This means you would have to transfer millions of loans,” he said in Luxembourg on Monday. “In Greece alone, there are more than half a million corporate” and small-business soured loans.

The European Central Bank has ramped up efforts to help euro-area banks get out from under a mountain 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.”

The European Commission has also taken a crack at easing banks’ bad-loan burden by overhauling insolvency rules as part of an effort to develop the bloc’s capital markets.

Critical Mass

The plan would help establish a market for non-performing loans by achieving a critical mass of such assets and giving private investors a one-stop shop for them, Enria said, according to remarks distributed by the EBA. Benefits of the structure include clarity and consistency on the role of state aid and the avoidance of potentially confusing different national approaches, he said.

“You identify steps to help establish a market solution,” Regling said. “There are many issues that need to be sorted out: corporate governance, funding and the role of governments. The AMC will have to issue billions of euros of debt. That is no simple task.”

Enria’s proposal sets the difference between the market price of the assets moved to the management company and the transfer price as the extent of what he called “theoretical” state aid. That would be crystallized by a failure to realize the transfer price, which would then be clawed back from the originating bank. The member state would then recapitalize the lender.

‘Significant Challenges’

The result would avoid burden sharing between states while the aid would be conditional on the lender’s stakeholders suffering losses through dilution and conversion of subordinated bonds to equity, he said.

Regling said the bad bank “should not just be a vehicle to clean up the balance sheets of banks, so as not to simply shift the problem between the public and private sector.” If the EU doesn’t address over-indebtedness, “it will come back to haunt us later,” he said.

The European Commission, the bloc’s executive arm, said in an e-mailed statement that banks in the region still face “significant challenges,” with high or very high levels of non-performing loans in some member states. The commission is already “working constructively” with those governments to gradually reduce banks’ non-performing loans, it said.

“We are also looking into additional viable approaches, in close cooperation with member states and bank supervisors and other stakeholders to address this important structural issue,” a commission spokesperson said.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE