ECB: Banks should cover 100% of "red loans"

The European Central Bank (ECB) is preparing to ask the eurozone banks to put aside more funds to cover the "red loans", as Reuters reports. 

The news agency, relying on its draft proposal, says that on 1 January the ECB will give banks two years to put aside the necessary funds to cover 100% of the value of unsecured debt that is not served and has recently been classified. 

At the same time, in seven years should be able to cover all the bad loans secured, as the draft outlines. 

Non-performing loans burden banks' balance sheets and prevent lending - creating a problem for the ECB as weak credit expansion mitigates the impact of monetary stimulus on low interest rates, the agency notes.

However, the measures will not affect nearly 1 trillion euros bad loans already in banks' books. They have the goal, as reported by the agency, to prevent the accumulation of new "red" loans. 

"The problem for banks is that there is not an efficient market for non-performing loans, so their sale will lead to big losses and will force them to raise their capital, an accurate exercise given the low ratings of the banks" writes "Backstops should not lead to sharp moves but should be gradually implemented by banks as soon as a non-served exposure is registered up to the point in time. the target for forecasts of 100% should be achieved ". 

The ECB did not want to comment on the draft, dated September 1. 

It plans to release the new guidelines on Wednesday, as part of a wider effort to launch emergency action. 

"In the Eurozone, banks put aside enough money to cover 45% of first-quarter non-performing loans," the paper said, and continues: "Lenders in Italy, Greece and Cyprus already have high rates of non-performing loans" . Italian banks had 263 billion euros at the end of the first quarter, covering 48.5%. In Greece, EUR 101.8 billion or half of all loans were classified as non-performing in the middle of the year, according to the data of the Bank of Greece. " 

In the draft, the ECB says that although the directives are not binding, banks should explain any discrepancies.