ECB backs ‘bad banks’ to clean up eurozone mess

The ECB’s vice president yesterday called for the creation of government-backed bad banks to help buy some of the €1tn in unpaid loans that have weighed on eurozone banks since the financial crisis.

ECB backs ‘bad banks’ to clean up eurozone mess

With lenders in Italy and other weaker economies struggling to find buyers for their bad credit, Vitor Constancio called for an EU blueprint for creating asset-management companies compliant with EU rules against bailouts.

Less than a week ago, Germany shot down a proposal by the European Banking Authority to create an EU-wide bad bank on the grounds that bad loans are concentrated in just a few countries, such as Italy, Cyprus and Portugal.

“A true European asset-management company, however, faces difficulties in the present environment,” Constancio said at an event in Brussels.

“In more immediate terms, a way forward could be the creation of a European blueprint for asset-management companies to be used at national level”, he said, calling for a flexible approach to European rules.

The ECB has been ratcheting up the pressure on banks to offload their soured credit, which it says ties up capital and curbs fresh lending. However, the market for European bank loans has not taken off, with transactions totalling €200bn in the last three years even after including exposures that are being repaid.

Mr Constancio said there was scope for national governments to step in and fire up that market by injecting capital into banks, guaranteeing securities backed by the non-performing loans, as Italy is doing, or even buying some of them. n Reuters

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