Getty Andrea Enria has called for a creation of an EU "bad bank"

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The scale of the EU’s banking problem has become “urgent and actionable”, according to Andrea Enria, chairman of the European Banking Authority. Mr Enria called for a creation of an EU “bad bank” that would buy up the toxic loans from lenders in an attempt to break a financial cycle of falling profits, pressure on lending and struggling economic growth. With the lack of a proper market for the selling of bad loans, banks have been reluctant to offload them and accept a price below market value.

Mr Enria envisioned the formation of a taxpayer-packed fund to buy the bad loans from struggling lenders at their “real economic value” - a level which would be determined by the fund at a later date. The proposal is likely to come under fire from opponents of state-funded aid for banks who will view any intervention as a distortion of the market mechanism. While Mr Enria is the Chairman of the EBA he has no power to introduce such a body.

Getty Chairman of the European Banking Authority Andrea Enria

The move comes though as the EU is currently examining ways of how to reduce banks’ non-performing loans and is currently consulting with national finance ministries and is working on a report which is expected to be published in March. The level of toxic debt within the EU banking system is sizeable with €1.06trillion equating to to 5.4 percent of the entire EU’s total loans - a figure more than treble that of other large banking sectors such as Japan and the US. Some 10 EU states have an average bad loan ratio of 10 percent.

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Getty Head of the European Stability Mechanism Klaus Regling

Italy has over a quarter of the EU’s toxic debt, which is valued at about £237bn (€276bn) and recently created a similar “bad bank” to buy up bad debt from weaker lenders which was funded by pooled finances from the stronger financial institutions. The European Central Bank had been exerting pressure on Italy as well as other eurozone countries to reduce the level of their bad debts and raise capital. The move effectively led to the nationalisation of Italy’s Monte dei Paschi di Siena, the country’s third-largest bank, after it failed to raise the capital demanded by the regulators from private investors last month.

Getty Monte dei Paschi di Siena's head office in Italy