Why the ECB is wrong with the new rules on bank bad debts
The intervention of Gaetana Lorenza Ortisi, national councilor of Unimpresa
On April 26, 2019, the European Central Bank introduced a new regulation aimed at loans disbursed by banks after April 26, 2019: the "calendar provisioning". This regulation requires that any credit, even if not bad, must be written down by the banks in their balance sheets by one third a year, so the result is that in three years it must be written down to 100%. This regulation that imposes drastic measures will also have to be applied to post Covid. Applying a mechanical rule, in a pandemic context like the one that is going through Italy, is like throwing an atomic bomb on the banking system. These are the considerations expressed in the hearing at the bicameral Commission of inquiry on banks on 9 September 2020 by Alberto Nagel, CEO of Mediobanca.
The calendar provisioning of the ECB, which requires the progressive devaluation of non-performing loans up to 100%, is a wrong regulation and should be revised as we enter this crisis with new and very pejorative rules. If we apply it to what is happening it causes a disaster in the balance sheets of the banks, and not just ours. The rule was introduced mainly because in Germany there was no trust in the quality of the assets of banks in southern Europe and, naturally, also in Italian ones. The risk is that banks would have to recapitalize in two or three years following the losses they will suffer as a result of the write-down of their credits. Aggressive credit devaluation in bank balance sheets, which does not take into account the different credit recovery times between different European countries, risks putting our credit system in serious difficulty. The weakest institutions will hardly find the resources on the market with the risk of a new wave of public interventions to support the banking system
Today the Covid effect is not yet seen. The measures that have been adopted to deal with the post-Covid emergency in Europe and in Italy have had a positive effect but now we have entered a recession with lasting effects and therefore different measures are needed because the emergency interventions will run out and in the meantime will not structural interventions have been introduced. Precisely for this reason it is necessary for the Basel Committee and the ECB to start reflecting on more flexible rules in this difficult moment of the individual national economic systems linked to an exogenous shock, suspending the application of existing rules.
Therefore it is essential to find alternative systems for the repayment of impaired loans also through systems capable of deferring debts, in compliance with the rights of all parties, such as a home saving fund that allows the indebted to reshape their debt and remain in mortgaged homes.
It is also essential to take action by the ECB aimed at lengthening the timing of the devaluation of banks' loans so that the need for their recapitalization in the short term is avoided.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-la-bce-sbaglia-con-le-nuove-regole-sulle-sofferenze-bancarie/ on Tue, 22 Sep 2020 05:12:10 +0000.