Financial stability in the Banking Union amid the COVID-19 crisis: inputs for debate concerning the creation of a European bad bank
Over the last few weeks, voices have been raised suggesting the creation of a pan-European Asset Management Company (a ‘European bad bank’) as a possible tool for strengthening financial stability across the EU Banking Union. In essence, this mechanism (advocated inter alia by Mr Andrea Enria, chairman of the Supervisory Board of the European Central Bank, ECB) would allow banks to ‘stop the rot’ and weed out non-performing loans (NPLs), separating them from viable loans.
In an article recently published in the Blog of the Single Resolution Board (SRB), Mr Antonio Carrascosa, Former Board Member of the SRB, acknowledges that the idea of creating a ‘European bad bank’ is not without merit, but advocates for exploring possible means to avoid the phenomenon of NPLs and the losses associated with them in the first place, rather than focusing exclusively in ex post measures.
Overall, the article identifies some problems linked to a publicly funded and central ‘European bad bank’, and suggests that a smaller network of national and privately funded bad banks may be part of the solution, if combined with banks implementing appropriate risk assessment measures. This is something that is expected to be the subject of relevant debate in 2021, as NPLs are going to rise due to the COVID-19 crisis.
The article published at the SRB Blog ‘A European Bad Bank – a necessary tool for financial stability?’ is available here.