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The EU Looks to Get Tough on the Large Amount of Bad Loans

18 December 2017, 15:46 CET

It's no secret that Italy holds the majority of the EU's bad loans and with it receiving so much attention as of late it was only a matter of time before rules got changed, and banks started to cut bad debt.

Well it looks as though the time has come and the EU is ready to get tough on these bad loans as moves are being made that would possibly make it faster and easier for those holding the bad debt to sell it off cheaply. At the same time, there would be no need to make adjustments to the calculation of a loss given default.

Mario Draghi - Photo Pixabay

What this means is that these Italian banks that are currently holding so many bad loans would then be able to sell them off at a large discount and not need to hold additional capital.

The Big Three Institutions Aren't in Agreement

While it may sound like this is a great solution, that isn't necessarily the case. In fact, the three main institutions in Europe are now fighting amongst each other in hopes of finding a solution that works for all when it comes to these bad loans. Currently the European Parliament, the European Central Bank, and the Council of the European Union are at odds. Right now, it seems the European Central Bank is the one taking the hardest stance on the issue.

The stance of the Central Bank is that it wants to make sure all the banks are in a good and sound position so that when the next financial crisis hits, they are prepared. While it's hard to predict when this next crisis could occur, there is one that is bound to happen eventually. They are asking for a lending system that is safer for all involved, thereby limiting the amount of risks posed by the banks.

Not Unique to the European Union

While the majority of these "bad loans" are primarily held by Italian banks, it's not an issue that is unique to Italy, or the European Union for that matter. All you have to do is look to the US in terms of how they are dealing with, doing their best to prevent these bad loans from happening. Those with poor or bad credit in the country account for about 68 million people, and they have the option of getting a personal loan from a creditor that deals specifically with low credit rating.

In general, most banks feel wary of lending to those who are considered "high risk" since they don't want to end up with a bad loan in the future. These lenders who deal with poor and bad credit applicants tend to look a little closer and make sure there is a viable path to paying off the loan.

The Discussions Rage On

So, for now there is no set solution but there are plenty of discussions happening. It seems all the top players are looking for a solution, and all of them recognize it's time to step in and do something about the sheer volume of these bad loans.

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