EU ministers want Commission to consider bigger capital buffers for bad loans

An European Union (EU) flag is pictured during a ceremony in Lausanne

BRUSSELS (Reuters) – European Union finance ministers are expected to call for a tweak to banking rules next week that could force lenders to set aside more capital against new loans that may turn bad, according to a draft document seen by Reuters.

EU ministers have never before suggested changes in banking rules specifically to raise capital buffers to cover NPLs.

The move is part of a wider plan to address problems with bad credit, known also as non-performing loans (NPLs), on the balance sheets of some EU member states’ banks, seen as a problem for the whole bloc because of spill-over risks.

In a regular meeting on Tuesday in Brussels, EU finance ministers will ask the EU Commission to consider “prudential backstops addressing potential under-provisioning which would apply to newly originated loans”, the draft document said.

Banco Popular and two small Italian banks were liquidated in June after their bad loans became unmanageable, and, this week, Monte dei Paschi di Siena <BMPS.MI> got approval for a 5.4 billion euro ($6.1 billion) state bailout to plug the capital hole caused by the sale of bad loans.

While NPLs dropped to 4.8 percent of all loans in the EU in the first quarter of 2017, they remained well above 40 percent in Greece and Cyprus, at 18.5 percent in Portugal and 14.8 percent in Italy, European Banking Authority data shows.

To help address the problem, ministers will also ask for national asset management companies to be set up to facilitate the development of a functioning secondary market for bad loans.

(Reporting by Tom Koerkemeier and Francesco Guarascio @fraguarascio; Editing by Louise Ireland)