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The vice president of the European Central Bank has urged governments in the eurozone to consider setting up “bad banks” to deal with the continent’s toxic loans problem, in the latest senior call for state involvement to clean up Europe’s financial sector.

Vitor Constancio, the second most senior official at the ECB, said state-supported bad banks – which hive off non-performing loans – offered a “quick clean-up of bank balance sheets” and can stem “fire sale losses” for lenders seven years after the global financial crisis.

The eurozone’s banking system lumbers under more than €1tn of toxic loans, with lenders in the bloc’s weaker member states suffering the most. In Greece and Cyprus, around a half of all loans are non-performing, accounting for a third of all banking sector assets.

Among the major banks supervised directly by the ECB, the bad loan ratio amounts to 6.4 per cent, or 9 per cent of total eurozone GDP. The non-performing loans problem has been exacerbated by years of weak economic growth and pushed down on the profitability of Europe’s banking sector.

“History has proven that asset management companies can swiftly clean up NPLs from bank balance sheets, and resolve them over a longer period of time”, Mr Constancio said in a speech in Brussels on Friday.

Earlier this week, the chairman of the European Banking Authority, Andrea Enria, called for the creation of a taxpayer backed EU-wide bad bank to buy up billions in non-performing loans from struggling banks.

Mr Constancio said the creation of an EU-wide bad bank, known as an “Asset Management Company”, would be “welcome” but faced complications under the eurozone’s rules on state aid.

The central banker suggested one “way forward could be the creation of a European blueprint for AMCs to be used at national level.”

“This European blueprint should clarify what is possible within a flexible approach to the existent regulation and encourage countries to adopt all necessary measures in a well-defined time frame”.

Ireland and Spain both set up bad banks at the height of their respective financial crises in 2009 and 2012. Last year, Italy and the EU agreed to allow Italian banks to sell large amounts of bad loans to private investors with a government guarantee.

Italy currently accounts for a quarter of the EU’s total bad loans at €276bn – the highest ratio of failing assets of any major economy in the single currency area.

“The benefits from resolving the NPL problem are unquestionable, but a great deal of hard work is clearly needed, on many fronts, to deliver them”, said Mr Constancio.

“Neither a partial solution, nor further waiting is an option”.

Copyright The Financial Times Limited 2017. All rights reserved.
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