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ECB official urges ‘bad bank’ as toxic loans rise

Published on October 27, 2020

The European Central Bank’s supervisory chief on Tuesday urged the creation of EU-wide “bad bank” to ring-fence toxic loans that threaten to explode in the wake of the coronavirus pandemic.

In an opinion piece for the Financial Times, Andrea Enria said in a “severe but plausible scenario” that non-performing loans (NPLs) could reach 1.4 trillion euros ($1.7 trillion), well above levels during the financial crash and eurozone debt crisis.

A build-up of NPLs, in which borrowers are unable to make repayments on time, can cripple the stability of commercial banks.

A “bad bank” is an institution set up to buy up bad loans, thus helping commercial banks improve their balance sheets. One was used successfully to help Spanish banks as part of a 40-billion-euro rescue package from the eurozone in 2012.

Enria said a European asset-management company or a network of national companies would be a solution to ensure “an integrated European response” to mounting bad loans, and the scheme could by funded by issuing debt “guaranteed by a European body”.

In 2018, the European Commission put forward a plan to manage toxic loans, opening the possibility for states to create a structure to get rid of risky assets, though member countries were unable to come to a consensus.

But EU nations’ commitment to a 750-billion-euro recovery fund to combat the economic shock of the pandemic shows typically hesitant countries like Germany could change course on the critical subject of debt pooling.