ROME (Reuters) - Banks in the European Union will have eight years to write down bad debts backed by collateral under proposals from the European Commission designed to tackle their 759 billion euros ($933.19 billion) in soured loans, a source familiar with the matter said on Friday.
The source, confirming a press report in Italian daily Il Messaggero, said the percentage of writedowns required every year once a loan is classed as impaired would rise gradually over time.
High levels of bad debts, a legacy of the euro zone’s debt crisis, are blamed for holding back lending in the EU and for keeping the cost of capital high for banks, slowing their recovery and depressing profitability.
The Commission, which is expected to publish its proposal on the new bad loan criteria on March 13, declined to comment.
“In March, we will present a whole package of further proposals to help banks reduce non-performing loans and prevent their accumulation in future,” the Commission’s Vice-President Valdis Dombrovskis told a conference in Berlin on Friday.
For unsecured loans, banks would be required to write them down by 35 percent in the first year and for the remaining 65 percent of their face value in the second, the source said.
According to the draft, when a loan is only partly covered by the value of its collateral it would be considered as secured for that part and as unsecured for the rest, the source also said.
The European Central Bank is also working on a new set of rules over banks’ bad debts to complement guidelines issued last year.
The ECB’s guidelines, unlike the Commission’s, are not mandatory but bank supervisors will expect banks to comply and reserve the right to enforce compliance if a bank does not justify any deviation.
The ECB’s proposed new rules, which would apply to new bank loans turning sour, require banks to write down bad loans backed by collateral in seven years and unsecured loans in two years with writedowns split equally over the years.
The ECB proposal, which was heavily criticized, particularly in Italy, is expected to be published on March 14.
Additional reporting by Francesco Guarascio in Brussels, Huw Jones in London. Writing by Giulio Piovaccari. Editing by Giselda Vagnoni and Jane Merriman