Edition 1453
09 December 2017
Edition: 1453

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Reducing bad loans is vital – Bank of Portugal chief

by TPN/ Lusa, in Business · 12-10-2017 14:57:00 · 0 Comments

Reducing levels of non-performing loans (NPL) at banks is essential for the common deposit guarantee system to be put in place across the European Union, which is one of the pillars of the Banking Union, the Governor of the Bank of Portugal said on Monday.

Reducing bad loans is vital – Bank of Portugal chief

Carlos Costa, on Monday opened the 27th Lisbon Meeting between central banks of Portuguese-speaking countries, and focused his speech on the European Banking Union, a process that has yet to be concluded.
In relation to the third pillar of the Banking Union, the common deposit-guarantee system across the whole Eurozone, Costa again noted the skepticism of the Northern European countries, which make the implementation of this system dependent on “risk reduction,” meaning they want to reduce the risk of incurring losses due to banks going bust in other countries.
“There is a balance [that has to exist] between risk-sharing and responsibility for risk. This is why the reduction of bad loans or NPL is a critical issue from the point of view of the Banking Union, it determines the stability of the systems and conditions the pace of the Banking Union,” said the governor of the Portuguese central bank.
Since the financial crisis, which has increased NPL, the central bank has drawn attention to the need for banks to reduce bad loans, which weighs on their balance sheets and limits the ability to grant new credit.
In 2011, the possibility of moving forward with a ‘bad bank’ was mentioned, but the lack of flexibility of public finances, in particular, made this solution impossible, as it would require some kind of state guarantee. This solution was used, in different ways, in Ireland and Spain.
Thus, in recent years, each bank has pursued its own NPL reduction strategies (NPLs).
Recently, the Portuguese Government pushed for the creation of the credit management platform between BCP, Caixa Geral de Depósitos and Novo Banco, which helps to restructure loans, but this is seen as just one more step in a wider process.
On this platform, the restructured loans remain on the banks’ balance sheets.
The future banking union consists of three pillars: the Single Supervisory Mechanism is the first and is already operational, with the European Central Bank (ECB) in charge directly overseeing the main European banks, such as Portual’s Caixa Geral de Depósitos (CGD), BCP and Novo Banco.
The second pillar is the Single Resolution Mechanism and it is responsible for resolution of and/or restructuring banks at risk of bankruptcy.
The aim is for the mechanism to have funding of €55 billion by 2024, raised through contributions from banks. The Single Resolution Mechanism will also be able to finance itself in the markets by issuing debt.
Finally, the third pillar is the Common Deposit Guarantee Fund. This part of the process is lagging behind, with many doubts about its implementation, and many countries, such as Germany, putting up obstacles.

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Edition 1453
09 December 2017
Edition: 1453

Read this week's issue online exactly as it appears in print.

Twitter