Newly-appointed European Financial Markets Commissioner Mairead McGuinness will press governments – including Ireland’s – to set up Nama-style bad banks to take over the expected rise in bad debts in the wake of pandemic.
In an action plan to be tabled on Wednesday, Commissioner McGuinness will set out her thinking on how “asset management companies” – or ‘bad banks’ – can be used to lower banking sector risk.
However, the plans face opposition – including from Ireland, where the prospect of a new bad bank taking on small business or mortgage debt just as Nama is set to close is likely to be politically fraught.
The coalition government here is understood to want to focus non-performing loans efforts on consumer protection and forbearance and encouraging banks to deal with arrears on a case-by-case basis.
The EU has always advised “reasonable forbearance” on mortgage loans, but the current crisis is expected to generate a large volume of small business failures.
While not a legal proposal, the European Commission is offering its technical expertise to countries that want to pool bad loans.
It is also pressing EU governments to agree draft insolvency rules that have been on the table since 2016.
The Commission’s ultimate aim is to develop a more active secondary markets for buyers and sellers of bad debt, which it hopes to do by increased data sharing and links between national asset management companies. Ireland has already seen billions of euro in such deals over the past decade, with portfolios of property debt, bad mortgages and performing loans sold or securitized.
The Commission plans stop short of recommending an EU-wide bad bank, as suggested recently by the EU’s chief bank supervisor, Andrea Enria.
The Central Bank’s Deputy Governor, Ed Sibley, has repeatedly warned banks here to act early to avoid a build up of bad Covid debts by engaging with borrowers coming off payments breaks.
He told the Oireachtas on Tuesday that lenders should “continue to seek to sustainably resolve borrowers’ longer term distress”.
Meanwhile, Eurozone finance ministers led by Paschal Donohoe will meet on Wednesday to discuss the economic situation post-Covid, and to scrutinise each other’s 2021 budgets.