Reuters: Italy’s central bank asks ECB to soften bad loan plans

Italy’s central bank is calling on the European Central Bank to soften new requirements for banks to set aside more capital to cover newly classified bad loans, a source told Reuters.

Italian banks hold nearly 30 percent of the euro zone’s 915 billion euros ($1.1 trillion) of problematic debts and investors are concerned new ECB guidelines announced on Wednesday will lead to further write-downs of soured loans. The source, who is close to the Bank of Italy, said it wanted secured loans to be exempted from the new rules, challenging one of the main planks of the ECB guidelines, which are the subject of a public consultation until Dec. 8.

The ECB’s guidelines say that starting on Jan. 1, banks will have at most two years to set aside funds to cover 100 percent of their newly classified non-performing unsecured debt and seven years to cover all secured bad debt. The Bank of Italy also wants to make sure that existing bad loans are not affected by the new rules, the source said. The guidelines are to apply to loans newly classified as impaired from Jan. 1 next year, but Italy fears they could be extended to apply to all existing bad loans.

The ECB has said it would come up with new rules on treating legacy assets before the end of the first quarter of next year. Its proposal argued that if a bank was unable to realize collateral after seven years, it should be deemed ineffective and thus the loan should be treated as unsecured, even if the delay was for reasons outside the bank’s control. The ECB declined to comment on the Bank of Italy’s request to exclude secured loans from the new rules.

The Bank of Italy hopes that the consultation process will lead to a balanced version of the measures, the source said, although ECB consultations of this type do not usually result in fundamental changes to the original proposals.

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