© Reuters. FILE PHOTO: Brexit talks take place at the European Commission headquarters in Brussels

By Huw Jones

LONDON (Reuters) – The European Union set out plans on Wednesday to help banks jettison soured loans more easily and continue lending to households and business hit by the COVID-19 pandemic.

A lesson from the last financial crisis was that failing to tackle unpaid or “non-performing” loans (NPLs) left banks unable to make loans, the lifeblood of recovery in a region such as Europe that relies heavily on banks for corporate funding.

The volume of distressed loans is expected to rise next year, after the expiry of mortgage repayment holidays for households and relief measures for companies introduced when economies went into lockdown.

NPLs were 2.8% of loans at EU banks at the end of June, up 0.2 percentage points from the fourth quarter of 2019.

The European Central Bank’s head of banking supervision, Andrea Enria, has warned there could be a “huge wave” of unpaid loans that could top 1.4 trillion euros.

“Today we put forward a set of measures that, while ensuring borrower protection, can help prevent a rise in NPLs similar to the one after the last financial crisis,” said EU financial services commissioner Mairead McGuinness.

Building on previous measures, the European Commission set out proposals for a more efficient market for soured loans by creating a network of national “bad banks”, underpinned by a central database to enhance transparency.

Bad banks buy bad loans, and the package should give sellers a wider choice of buyers.

It stops short, however, of creating the EU-level bad bank that Enria had called for, as reaching agreement on this would have wasted “precious time”, an EU official said.

In time, the bad banks may be required to use a “template” to ensure that NPL data is comparable across the EU.

Brussels also wants more convergence in national insolvency rules, and is proposing that a bank buying bad loans should not have to set aside more capital than the seller.

The EU package also clarifies the bloc’s rules on state aid to banks during economic shocks such as the pandemic, known as “precautionary measures”. Under this provision, no funds should be given to lenders already suffering problems.

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