The European Central Bank hit back at criticism from European Union lawmakers who said recently proposed measures to tackle soured debt on lenders’ books may have overstepped the ECB’s mandate as euro-area bank overseer.
The ECB’s draft guidance on non-performing loans, issued last week, is on solid legal ground, a spokesman said by telephone in Frankfurt yesterday. Antonio Tajani, president of the European Parliament, questioned in a October 9 letter to ECB president Mario Draghi whether such measures could be imposed without the involvement of the EU legislature.
Asked on October 11 about Tajani’s letter, European Commission vice-president Valdis Dombrovskis backed up the ECB. When the public-comment period concludes and the ECB issues final guidance, the commission is “confident” that any action taken “will stay within SSM legal competences,” Dombrovskis said, referring to the Single Supervisory Mechanism, as the ECB’s oversight arm is known.
According to the ECB’s proposed guidance, lenders would have to provision against the whole of the potential loss on nonperforming loans that aren’t backed by collateral after two years, and losses on secured loans that have defaulted would have to be fully covered after seven years at the latest. The proposal applies to loans newly classified as nonperforming starting on January 1.
That met with resistance from Italy, with Finance Minister Pier Carlo Padoan saying he had “perplexities” about the ECB’s plan.
Dombrovskis spoke after the commission, the EU’s executive arm, presented a range of measures for tackling non-performing loans that it will put forward at the beginning in 2018. It also issued a report on the SSM that some analysts read as an attempt to rein in the ECB on dealing with bad loans.
Some Italian medium-sized banks gained on Wednesday after such comments, only to give up some of those gains yesterday. Banco BPM declined 1.8% in Milan after having advanced 4.8% on Wednesday, while BPER Banca fell 2.1% after rising 3.5%. The FTSE Italia All-Share Banks Index, which had gained 1.4%, fell 1.1%.
The ECB spokesman, who asked not to be named in line with the central bank’s policy, pointed to last week’s proposal, which states: “Where provisioning levels are considered to be inadequate for prudential purposes, supervisors are obliged to ensure that banks reassess and increase respective risk coverage in order to meet prudential expectations.”
The commission said in its report that the ECB is “encouraged to apply the whole panoply of supervisory powers to allow risks to be addressed through the most suitable supervisory tools.”
Existing powers available to supervisors include the possibility to “influence a bank’s provisioning level within the limits of the applicable accounting framework and to apply the necessary adjustments (deductions and similar treatments) in case, for example, accounting provisioning is not sufficient from a supervisory perspective,” the commission said.
A commission spokeswoman declined to elaborate on Dombrovskis’s October 11 remarks.
Mediobanca analysts led by Andrea Filtri said the commission’s reading of EU law in the report “does not support the SSM power to impose standard blanket provisioning levels in Europe, like the guidelines proposal published last week on new NPL flows.”
Markus Ferber, a German member of the European Parliament, joined Tajani in expressing concern that the ECB is circumventing legislators.
“The ECB should show some modesty,” Ferber said in an e-mailed statement. “I do not want to see the ECB creating a parallel regime of capital requirements that bypasses the legislator.”
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