The European Central Bank (ECB) has initiated a proposal to ask Euro area banks to reserve more cash in order to cover bad loans, according to a recent draft of the proposal. This now makes it greatly expensive for lenders to keep sitting on the bad loans. Unfortunately, the soured loans are filling up bank balance sheets and restricting lending.
European Central Bank supervisory chief Daniele Nouy has defended the proposal and stated that the plan is within the bank’s mandate and is necessary to combat soured bank debt.
This is an issue for the ECB since weak credit growth counteracts the stimulus it is striving to provide through low interest rates. And so, beginning as of the 1st of January 2018, the ECB will give lenders two years to allocate funds to cover 100% of the value of their recently classified non-performing unsecured debt. The draft conveys that the ECB will give lenders seven years to cover all of their secured bad debt.