FRANKFURT (Reuters) - The European Central Bank’s new and contested rules on how much money banks must set aside to cover loans that go unpaid might be “made redundant” by new European Union-wide legislation, the ECB’s top banking supervisor Daniele Nouy said on Monday.

The European Central Bank (ECB) headquarter is illuminated during a preview for the Luminale light show in Frankfurt, Germany, March 16, 2018. REUTERS/Kai Pfaffenbach

Her admission, though tinged with scepticism, is likely to be seen as a victory by EU lawmakers and bankers in Italy, who have lobbied hard against ECB measures they fear could hurt economic growth and conflict with the planned EU law.

Criticized anew at an EU parliamentary hearing on Monday, Nouy said it would be good if EU law made the ECB’s guidelines “redundant” but that she was skeptical this would happen.

“It means that we could turn the page and move to something else,” Nouy told the hearing. “I’m a little bit skeptical but I’ll be the first to celebrate if that is the case.”

The ECB’s rules, unveiled in watered-down form earlier this month, give banks two years to provide for a loan that sours if it is not backed by collateral and seven if it is. They are not due to be fully enforced until 2021.

The Commission’s proposal is more lenient as it only applies to newly granted credit and gives banks an extra year for secured loans, among other aspects.

“In the end there should be an alignment, otherwise we just create confusion,” Roberto Gualtieri, the Italian chair of the European Parliament’s economic committee, told Nouy during the hearing.

He said he aimed to have the Commission proposal on the matter adopted before the next European elections in the spring of next year.

Nouy was presenting the ECB’s annual supervision report, which showed shortcomings and miscalculations worth more than 10 billion euros ($12.44 billion) had been found by her inspectors when going through euro zone banks’ loan books last year.

Some banks were found to be deficient in the way they identify problem customers and loans, set aside provisions and choose when to grant credit, among other areas.

The ECB is now due to come up with a separate set of rules tackling bad loans already on banks’ balance sheets, a 700 billion euro legacy of the last recession that still affects most countries in Southern Europe.

“EMBARRASSING”

During the hearing, Nouy also fielded questions from European lawmakers about the ECB’s failure to act in cases of alleged money laundering at Latvia’s ABLV Bank and Malta’s Pilatus Bank, unearthed by U.S. authorities in recent weeks.

She stressed the ECB had no competence over money laundering but described the incidents as “embarrassing” and called for new EU legislation on the matter and even the possible creation of a dedicated watchdog.

“I agree with you it’s very embarrassing to depend on the U.S. authorities to do the job,” Nouy said. “This has to change.”

ABLV Bank was declared failed by the ECB last month after being accused by U.S. authorities of large-scale money laundering.

Malta’s regulators imposed a freeze on the business of Pilatus Bank last week after its chairman’s arrest on charges of breaking U.S. sanctions.

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