ECB may buy non-performing Italian bank loans

The struggling Italian banking system is back in focus after reports that the European Central Bank is in talks with Italy over buying bundles of its banks’ bad loans.

According to Reuters, Italian Treasury officials said the ECB is discussing buying the loans as part of its asset-buying programme and that the ECB would then accept them as collateral from the banks in return for cash.

Such a scheme would help the ECB loosen eurozone monetary policy further – as it is expected to next month. However, it would also inevitably raise concerns about the level of risk the ECB would be taking on if it were approved.

ECB President Mario Draghi said again on Monday that the ECB is ready to act. He “talked up the prospect of further easing in March amidst talk that the central bank could buy securities backed by bad Italian bank loans,” notes Jasper Lawler, a market analyst at CMC Markets.

However, “with an Italian banking sector on the brink of collapse (unless the ECB steps in to buy all their non-performing loans), Draghi looks caught between a decisively rocky rock and a really rather rigid hard place,” comments Augustin Eden, an analyst at Accendo Markets.

Last week, the Italian government approved a decree on banking reform but that too was greeted with some scepticism. “We think it represents a step towards a new configuration of the Italian banking landscape. But we still have doubts on whether some of these changes, particularly when it comes to NPLs [non-performing loans], are meaningful enough beyond being a step in the right direction,” write Chiara Angeloni and Gilles Moec at Bank of America Merrill Lynch.

The Centre for Economics and Business Research puts the level of NPLs in Italy at around €350 billion.