ECB plans to establish a ‘bad bank’ for pandemic-related debts

Officials from the European Central Bank (ECB) are developing a plan to deal with potentially hundreds of billions of euros in unpaid loans due to the coronavirus pandemic, which includes the establishment of "bad bank," two informed sources said. The plan, being formulated at a time when Europe is raising 1 trillion euros to strengthen the economy, aims to protect commercial banks from any fallout from the crisis in case rising unemployment reduces the income needed to repay loans.

One of the people familiar with the plan said that the ECB has set up a working group to study the idea of „bad bank“ for storing unpaid debt in euros. The concept "bad bank" is designed for banks established to buy bad loans and other illiquid assets from other financial institutions.

The ECB declined to comment on whether it is working on the "bad bank" plan.

The amount of debt in the eurozone that is considered unlikely to ever be repaid already exceeds 500 billion euros, including credit cards, auto loans, and mortgages, according to official statistics. This debt is expected to rise as the COVID-19 pandemic takes everything from borrowers and could even increase to 1 trillion euros, burdening already affected banks and making new lending more difficult, sources familiar with the ECB’s plans said.

The idea of "bad bank" in the eurozone was discussed and then abandoned two years ago, but under its new president Christine Lagarde the ECB has consulted banks and European officials about the plan in recent weeks, one of the sources said.

As the most powerful institution in the eurozone, the ECB’s support for the plan is crucial, but it will also require approval from Germany, which is the largest economy in the bloc. Berlin has long opposed ideas that accept joint responsibility for debts in other countries, although it recently expressed a different opinion and agreed to collaborate with other EU countries on the coronavirus recovery fund.

One of the proposals being discussed would also involve the European Stability Mechanism, which is a European institution that can provide financial assistance to eurozone countries or lenders, which would stand as a guarantor for bad banks, sources said. While European countries are now focused on launching a 750 billion euro plan to assist economies affected by the COVID-19 pandemic, the idea of a bad bank and the ECB’s draft could be discussed among central bank governors and ministers at the end of the year.

{embed_digitalno_izdanje}{/embed_digitalno_izdanje}