BANCO BPM S.P.A. The ECB last week issued new proposals that will force banks from 2018 to set aside more cash against newly classified bad loans and, early next year, could revise recent guidelines for the reduction of the soured debt stock.
Italy - whose banks hold nearly 30 percent of the bloc's 915 billion euro (817.01 billion pounds) bad loans - has reacted angrily to the proposals, asking the ECB to soften them following a public consultation that runs until Dec. 8.
"We have found already a solution for non-performing loans going forward (but) we are still concerned we have to deal with the existing stock," Mersch told a conference at Milan's Bocconi University when asked about Italy's worries over the new rules and whether they would apply only to new NPLs.
His comments weighed on Italian banking stocks, traders said, making BPER Banca (>> BPER) the biggest loser among blue-chips with a 3.6 percent drop, followed by Banco BPM (>> Banco BPM) which fell 2.6 percent and UBI Banca (>> UBI Banca), down 1.8 percent.
Lengthy recovery procedures put Italian banks at a disadvantage as the new rules require lenders to set aside cash at regular intervals against loan losses.
Mersch acknowledged bad loans were a bigger problem for some countries, but said that the euro zone's financial system had to shed risks so that its integration could progress.
"If we have rules in Europe, we cannot always put forward cultural exceptions, especially if these cultural exceptions are ... home-made," he said.
"Bankruptcy laws are still a national competence and judiciary reform is a national competence. So in order to speed up the European banking union... you need to bring your own house in order in every country."
Separately, the ECB also said on Monday that 51 unnamed large euro zone banks are leaving themselves exposed to a sudden change in interest rates and may need to aside more capital against that risk.
STIMULUS
Asked whether the ECB this month should provide a firm date to end its quantitative easing programme, Mersch said: "While it is true that the outlook has considerably improved, broadly-based, geographically and also across different sectors, it is also true that we have seen some disappointments in the development of inflationary pressures."
He added that the ECB still needed to process the latest data and incorporate them into its policy decision.
Mersch is considered a hawk, more aligned with the German-led camp, but his comments on Monday suggest support for the "patience and persistence" approach advocated by ECB President Mario Draghi.
Markets expect the ECB at its Oct. 26 meeting to cut asset purchases by a third while at the same time extending quantitative easing by 6 or 9 months and signalling very easy monetary policy for a long time to come.
(writing by Silvia Aloisi; Editing by Jeremy Gaunt)
By Valentina Za and Gianluca Semeraro
