Euro zone banks may get reprieve until 2021 from ECB bad debt rules

The European Central Bank`s long-delayed guidelines on treating new soured bank debt will go into effect on April 1, but lenders may get a reprieve from full implementation until 2021, it said in a statement on Thursday. Weighed down by around 750 billion euros worth of existing bad loans, euro zone banks are struggling to overcome the legacy of the bloc`s debt crisis, dragging on new lending and weakening the effect of the stimulus the ECB is trying to provide through rock-bottom borrowing costs.

Hoping to ease concerns about its original proposal, the ECB said the guidelines were non-binding expectations and would merely serve as the basis for case-by-case dialogue with banks on how they provision against bad debt. "The result of this dialogue will be incorporated, for the first time, in the 2021 Supervisory Review and Evaluation Process," the ECB said in a statement. "Banks should use the time to prepare themselves and also to review their credit underwriting policies and criteria to reduce the production of new non-performing loans (NPLs), in particular during the current benign economic conditions."

According to the guidelines, banks will have two years to fully provision for soured non-secured debt, while in the case of secured loans the deadline will be seven years. The new guidelines were intended to take effect on Jan. 1 but the bank pushed back its deadline to revise the proposal after fierce criticism, particularly from Italy, whose banks have accumulated more bad debt that most in Europe.

Bankers and European parliamentarians, particularly from Italy, fear that forcing banks to set aside more money against their bad loans will strangle lending in economies that are already missing out on the brisk economic expansion taking hold in other parts of the euro zone.

They argued that the ECB`s original proposal was contrary to EU legislation as it set blanket rules for an entire sector, a move outside a supervisor`s prerogative. "The addendum is non-binding and will serve as the basis for the supervisory dialogue between the significant banks and ECB Banking Supervision," the ECB said.