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Proposal for an EU "bad bank" put forward
The European Banking Authority would like to create an asset management company to buy up some of the nearly EUR 1,000 billion worth non-performing loan portfolio of euro zone banks and use freed-up lending capacity to awaken the slumbering economy of the euro zone.
On Monday Andrea Enria, chairman of the European Banking Authority put forward a proposal for handling the continent’s non-performing loans (NPL) in excess of EUR 1,000 billion in value: the European Union should create a publicly-funded asset management company to buy up bad loans from European banks. Enria hopes that this would increase profitability, ease the burden on creditors and speed up economic growth.
In most of Europe the market of bad loans has not picked up yet, and banks are discouraged to offload them at below market prices. According to Enria, the fund would purchase bad loans from the financial institutions “at real economic value". Klaus Regling, who heads the European Stability Mechanism (ESM), welcomed Enria’s proposal and said that the new entity could relieve the euro zone from NPLs worth around EUR 250 billion. However, Germany opposes Regling’s and Enria’s idea. “It is not clear what the added value of a European bad bank would have” a German government source told Reuters adding that “NPLs are a problem only in certain countries”. Berlin has been traditionally reluctant to back projects intended to share economic and financial risks among euro zone nations, fearing they could result in high costs for German taxpayers.
More than one quarter of all EU NPLs are stuck in Italian banks. NPLs in Greece and Cyprus account for over half of all banking loans, while Portuguese and Slovenian lenders are burdened with around 20% of soured loans. According to EBA figures, in Germany only 2.6% of loans are at risk of not being repaid.