BRUSSELS (Reuters) - The European Commission proposed on Wednesday new measures to make banks set aside more money for new loans that turn bad and facilitate the offloading of the existing non-performing loans, in a move meant to reduce risks in the banking sector.
Under the proposal, banks will have two years to fully cover potential losses from new loans that are not backed by a collateral.
For secured loans, lenders will have eight years to fully cover losses with gradual increases from a minimum 5 percent coverage in the first year to 27.4 percent in the fourth year and 75 percent in the seventh year.
"In case a bank does not meet the applicable minimum level, deductions from own funds would apply," a Commission document said.
The EU executive is also proposing measures to facilitate the offloading of the existing stock of bad loans that, although decreasing, still amount to 910 billion euros ($1.1 trillion), Commission data showed.
Under the Commission plan, which needs approval by EU states and lawmakers, banks in all 28 EU countries will be able to agree with corporate borrowers an accelerated out-of-court mechanism to recover the collateral in case loans turn bad.
This is meant to avoid lengthy judicial procedures that slow banks' recoveries in several EU countries.
The Commission is also proposing to further develop secondary markets for bad loans by creating a single EU market in a bid to increase the number of buyers of bad loans and raise their price closer to banks' valuations.
To further help lenders offload their bad debt, the Commission published non-binding guidelines to set up bad banks or asset management companies that would buy the loans, allowing lenders to focus on their core lending activities.
The guidance clarifies that state aid to set up these entities is allowed, but under precise conditions and as "an exceptional solution".
Governments could provide "market-conform" guarantees to securitize bad loans and can provide funds only if they operate as market agents, the Commission said.
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