‘Bad loans’ of banks risking credit crunch, warns European commission

Banks are loading up with loans that are unlikely to be repaid, teeing up Europe for a post-pandemic credit crunch, the European commission has warned.

As measures were unveiled to avert a freeze in consumer and business lending, the commissioner for financial services, Mairead McGuinness, said bank balance sheets risked being subsumed.

“We believe there will be an increase in non-performing loans,” she said. “People, in good faith, borrowed for businesses that cannot survive because of the pandemic … That’s why we want to move early and we want to move effectively, and we need that our banks, which were strong going into this crisis, remain strong, and continue lending.”

The latest figures for the first half of 2020 revealed a sudden halt in a downward trend in non-performing loans. At the end of the second quarter of 2020, the non-performing ratio for all EU banks was 2.8%, up 0.2 percentage points compared with the last quarter of 2019.

The commission, the EU’s executive arm, said it would seek to further develop pan-European secondary markets for distressed assets, to allow banks to move non-performing loans off their balance sheets.

The commission also wants to make it easier for governments to establish national asset management companies, or “bad banks”, to take on debt. Greater flexibility has already been provided to governments to provide subsidies to banks during the pandemic.

The proposals were criticised by the European Bureau of Consumers’ Unions, which said borrowers “would be exposed to vulture funds and debt collectors located in other countries, and potentially to even worse treatment and repossession of homes”.

McGuiness said the commission would learn from the past by providing stronger rights for those in debt.

She said: “Vulture funds – this is a word that strikes horror into many businesses, and indeed people who have dealt with vulture funds that I have direct knowledge of have shared some very difficult experiences.

“I think we can collectively say that we want to look after societal interest, so we need banks that function. We know that if we leave non-performing loans on banks there will be a credit crunch, and everyone will suffer. There are other implications if we do nothing.”

The commission said Brussels was not seeking to bail out the banks and that only institutions that had been well run before the crisis would benefit from the intervention.

Valdis Dombrovskis, the former Latvian prime minister, who is commissioner for the economy, said: “Given the pandemic’s massive impact on the economy it seems inevitable that bank equity will deteriorate. So we should learn the lessons from the past. If we fail to act in time [it] will become a drag on the economy.”