By Silvia Marchetti
ROME (MaceNews) – Italy wants greater flexibility over new tighter European-wide credit rules that could further worsen liquidity, according to ruling coalition sources.
The new framework, that came into force on January 1, introduces stricter parameters for the ‘default’ classification on non-performing loans and so-called ‘calendar provisioning’ for write-offs, combining a 90-day late payment threshold with new rules on past-due exposures.
Italy’s banking lobby and leading business groups have voiced concern that the new rules could worsen credit flows and the economic impact of the COVID-19 pandemic, and they are asking for a revision of the new regulation.
Ruling coalition sources argued that while changes might be difficult to make, Rome would raise pressure on Brussels to seek the most flexibility within the supervisory mechanism framework in defining and classifying defaults.
“It is key that such rules for the time being do not apply to loans benefiting from the moratorium and that their classification does not change, or it would be a disaster when the freeze ends,” said an official.
The risk that borrowers, especially firms, aren’t able to resume regular payments once the moratorium ends is already in itself a top source of concern and uncertainty, according to sources.
Rome will also aim to get more flexibility from the EU over potential state aid in supporting the disposal of non-performing loans through the creation of public-private asset management companies.
Even though EU rules against state aid have been partly lifted since the outbreak of the pandemic to help European governments tackle the economic emergency, it is not yet clear up to what extent and in what ways such leeway can be exploited.
A 5 Stars Movement source said that were the stringent credit rules to be fully applied it would be a ‘bomb’ for both lenders and businesses, and would curtail credit flows and investments at a time when the economy is severely hit by the pandemic. Many firms would end up cutting jobs and going bankrupt, the source said.
“Those rules were designed in a pre-COVID scenario and are now out-dated, they must be revised in order to reflect the current economic stalemate. It’s pretty obvious that the pandemic will inevitably cause an increase in bad loans and this regulatory new framework is just making it worse and will likely cause a large number of bad loans to automatically classify as default,” said the 5 Stars source.
An increase in NPLs due to the new rules would force banks to further raise capital buffers, lowering profitability levels.
The pandemic could undermine Italy’s recent progress in reducing the stock of bad loans sitting on lenders’ balance sheets, warned officials.
“The decrease in NPLs has so far benefited from the positive effects of government support measures including debt moratoriums and state-backed guarantees for loans that benefit from a more flexible classification and gradual calendar provisioning, but such measures are not permanent and are strictly tied to the pandemic emergency which will hopefully abate,” said another source.