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Reducing banking risk

The knot is in Italy, where there is a lack of recognition of impaired assets

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Reducing banking risk

The Bank of Spain has indicated on Monday that rate of delinquency of credit in Spain fell by 8.2% in October, one tenth less than in September. Across Europe, reduction of deteriorated assets inherited from crisis, famous legacy assets, is a topic of debate. In background is future of banking union. Moving towards a broader spectrum firewall and single-deposit insurance will require furr correcting that inheritance, especially in countries like Italy. If it is achieved, a complete banking union--which has already made considerable progress--will be able to reach even greater power to curb episodes of financial instability.

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What Central European countries intend-with Germany in lead-is that before moving towards a more explicit mutualization of risks, y will be reduced. The ECB itself decks out proposals to demand to take se risks out of balance and to provide provisions for more substantial losses. These plans are now being studied by European Parliament, which would finally be last word. The supervisory and political pressure is re, and it has its logic. To convince German voter of benefits of a common bank-protection project, a balanced starting point needs to be secured.

In eurozone, single supervisor estimates that re are still 800 billion euros in deteriorated assets to deal with. There are already regulations that exert ir own pressure, such as International Accounting Regulations IFRS9, which requires providing provisions in accordance with expected losses and not only incurred. It is about anticipating changes in economic cycle to avoid sudden changes in risk. Spain will implement it since January 2018.

But question is to what extent effort already made is worth appreciating. In Spain it has been very significant. Delinquent loans have been reduced by more than 94 billion only in last three years. Rar than disposing of deteriorated assets, y are managed efficiently. In recent weeks we have announced sales of portfolios of deteriorated assets day Yes, not day, for billions.

As has already happened with budgetary austerity, it has been advisable to do so gradually. In fiscal matters, only when a more realistic consolidation schedule was implemented was compatibility of budgetary adjustment and economic growth appreciated. The same thing happens with legacy assets. In Spain most important effort was made and now remains are handled with right tempo. The most significant conflict seems to be in Italy, where a good part of work is to be done and core of its banking crisis remains frozen by a lack of sufficient recognition of problem.

Only with that last effort, with proper pressure in countries where re is more to be done, ors like Germany could agree to move forward in a common deposit protection scheme and even in so-called "fourth pillar" of banking union, a management agency for Pan-European (bad bank) assets.


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