EU bad bank plan will face challenges - Moody's

Proposals for a European Union (EU) "bad bank" will likely face challenges on several fronts, but if operated across the euro area, or the EU as a whole, could help tackle Europe's high level of non-performing loans (NPLs), says Moody's Investors Service in a report titled  "Europe -- Banks: EU Bad Bank Plan Will Face Challenges,"

Key quotes

• Europe has by far the highest problem ratio of any of the world's major economic blocks and a reduction in asset risk would enable a more rapid recovery in bank standalone creditworthiness
• We believe any acquisition of a bank's problem loans at a price above "market value" using government capital would be considered state aid
• While there may be some flexibility in the rules, this would likely trigger "burden-sharing" requirements, leading to losses for subordinated debt holders at least
• Unless a consensus is reached in relation to the "bad bank" proposal for Europe, Moody's expects European banks to continue working down their problem loans gradually
• Current initiatives to tackle the problem include ultra-low interest rates and asset purchases by the European Central Bank (ECB), as well as strengthening banking supervision across the euro area under the Single Supervisory Mechanism