EU finance ministers to ponder Europe’s bad-loan problem

European Union finance ministers will try on Friday to find a way to deal with bad loans at European banks that drain their profits and capital and obstruct their financing of the economy.

The 2008 financial crisis and subsequent economic downturn in Europe increased the non-performing loans (NPLs) of EU banks, which now amount to 1 trillion euros ($1.07 trillion), or 5.4 percent of all bank loans.

The data come from a paper prepared for the ministers' discussions on Friday and Saturday at informal talks to be held in Valletta by the Maltese presidency of the EU.

The paper said it is difficult to compare levels of bad loans in banks elsewhere because no common definition exists, but they amounted to 1.7 percent of total loans in the United States and 1.6 percent in Japan in 2015.

"The pace of working out the NPLs is still relatively slow, and if action continues at that level it will take quite a bit of time," one EU official said.

Officials said banks could survive with a 5.4 percent bad loan ratio, but that the average masked huge differences between countries, ranging from 1 percent to 47 percent.

"We expect recognition from the ministers that there is a European dimension to the problem and so it makes sense that we have a common strategy," the official said.

The countries with the highest bad loan ratios were Greece, Cyprus and Portugal, followed by Italy, Slovenia and Ireland. Banks have made provisions for roughly half the bad-loan amount, officials said.

"Given its magnitude, the NPL problem will not solve itself, even in the context of economic recovery," the Maltese presidency paper said.

"Significant steps have already been taken in member states to tackle the NPL issue, including in the context of financial assistance program. More is needed, however, to bring the NPL ratio down to sustainable levels," it said.

The paper suggested ministers should push for unifying the treatment of bad loans by bank supervisors across the EU, unify insolvency laws, develop secondary markets on which banks could trade bad loans and set up asset management companies for NPLs.

Finally, ministers should consider restructuring in the banking system to help deal with high levels bad loans now and in make it more resilient to NPLs in the future. [Reuters]