EU says banks' bad loan woes ease but need capital buffer hikes

BRUSSELS (Reuters) - European Union banks' holding of bad loans is decreasing but remains high, the European Commission said on Thursday as it prepares measures to force higher provisioning for future soured debt.

The 2008-2009 global financial crisis left European banks saddled with piles of non-performing loans (NPLs) which they struggled to recoup from distressed firms and households.

But as the bloc's economy recovers, the amount of bad debt is slowly receding, the European Commission said in a report. Using data from the European Central Bank, the EU executive said NPLs accounted for 4.6 percent of banks' total loans in the period between April and June, a 1 percentage point drop from a year earlier.

Despite the trend, bad loans were still worth 950 billion euros ($1.16 trillion) in the 28 EU countries and accounted for 5.4 percent of total loans in the euro zone, the European 19-country currency area.

To tackle the problem, the Commission is planning new legislative measures, probably in March, to speed up banks' unloading of bad debts and to prevent a future build-up of NPLs.

An overhaul of insolvency rules and a strengthening of the secondary market for bad loans are among the measures planned to reduce the existing stock of soured debt.

Against a future growth of NPLs, the Commission plans to introduce "statutory prudential backstops to prevent the risk of under-provisioning of NPLs," the Commission said in a document, stressing that this would apply only to "newly originated loans that later turn non-performing".

The move clarifies the Commission's intentions. It had previously said legislative measures on buffers were possible but not certain.

It will still need to decide what could constitute a new loan and when the requirements would apply, EU officials said.

There is still debate on whether new loans should include restructured debt and new payments of installments on old loans.

The cut-off date for new loans is also under discussion. The Commission is considering four options: last November; the date of publication of the new proposals, likely to be in March; the date of the entry into force of the new measures, which could be two years away; or an even later date.

Italy, one of the EU countries with the highest level of bad loans, has long called for a gradual reduction of NPLs to avoid fire sales that would leave huge holes in banks' balance sheets.

Other states, led by Germany, have called for a faster offloading of bad loans to reduce risks in the banking sector, which could lead to euro zone's deeper financial integration.

(Reporting by Francesco Guarascio; editing by Philip Blenkinsop)