S&P: Italian Banks Most Exposed to ECB’s Bad Loan Plan

The new rules from the European Central Bank (ECB) regarding non-performing loans could significantly impact Italian banks and force them to reduce lending to companies, according to the rating agency Standard and Poor’s (S&P).

“We have noticed that Italian banks have become increasingly reluctant to lend to domestic corporations,” states the S&P report published on Monday, which examines the effects of the new ECB proposal. Among the most exposed are Italian, Greek, and Portuguese banks.

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The ECB has come under criticism for a proposal that would require eurozone banks to set aside funds for full coverage of loans that prove uncollectible within two years if they are unsecured, or seven years if they are collateralized.

The central bank is trying to find a solution to the problem of bad loans in the European banking sector, which is estimated to amount to as much as 1 trillion euros. However, the latest proposal could increase the amounts of reserves that some banks would be required to set aside for covering bad loans.

Italian officials have warned that this could harm corporate lending in the country, given that it is a nation where companies are mostly small and rely on bank financing.

S&P believes that Italian banks are potentially the most exposed among eurozone banks to the new ECB proposal, considering the very long period of restructuring problematic loans in that country.

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Credit placements to companies in Italy increased by 0.5 percent year-on-year in June, after decreasing by 20 percent annually since 2008, S&P reported.

The agency estimates that in Italy, approximately 100 to 120 billion euros of problematic loans will need to be sold by 2019, noting that the sale of large amounts of uncollectible debts at current prices could force banks in Italy and Portugal to take measures to strengthen capital.