By Francesco Canepa
FRANKFURT (Reuters) - The European Central Bank sought on Tuesday to defuse a conflict with European and Italian authorities over its plans for ridding euro zone banks of bad loans, opening the door to working with other institutions and tailoring its approach to each bank.
The ECB has come under fire for setting blanket rules for how much money banks should set aside for new unpaid loans. It is due to draft guidelines by March for existing soured credit, a much bigger issue at nearly 900 billion euros ($1.04 trillion).
Critics, including Italian Economic Minister Pier Carlo Padoan and the Italian head of the European Parliament, Antonio Tajani, fear the new rules will force banks to curtail lending or even need new capital.
They also say the guidelines encroach on the European Parliament's prerogatives and fail to account for countries, such as Italy, where justice is slow and the economic recovery fragile.
But ECB President Mario Draghi appeared to extend an olive branch on Tuesday, calling for a "joint effort" between regulators, supervisors and national authorities.
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"Currently the most important issue here is tackling non-performing loans," Draghi, himself an Italian, told an ECB conference.
"We therefore need a joint effort by banks, supervisors, regulators and national authorities to address this issue in an orderly manner," Draghi said.
His comments raised the chances the ECB's guidelines on legacy loans will be influenced by a legislative proposal that the European Commission is preparing in parallel on the matter, as reported by Reuters last month.
Eurogroup head Jeroen Dijsselbloem said on Monday there was "a general agreement" among euro zone finance ministers about the ECB approach.
But Italy's Padoan dissented, saying on Tuesday the plan went "beyond the supervisory limits" set for the ECB and called for a "reasonable method and timeframe" that did not create "new fragility".
ITALIAN FEARS
For Italian banks, sitting on a quarter of the euro zone's bad loans, the main fear is that the guidelines for new bad loans, which give banks seven years to provide for credit backed by collateral and two years for unsecured debt, may be applied to legacy ones too.
Their worries were echoed by the European Banking Federation, which said in a letter to EU authorities the new rules will put euro zone's banks at a competitive disadvantage.
Speaking after Draghi, the ECB's chief supervisor Daniele Nouy sought to assuage those fears, stressing the approach to legacy loans will be "case by case".
"For the legacy (NPLs), well, the situation is very diverse, so it has to be only case by case assessment and solutions," Nouy told a conference. "We are working with all the banks that have too high levels of non performing exposures."
Sources had told Reuters the ECB was rethinking its approach to legacy NPLs, originally modelled around its guidelines on new bad loans, due in part the Italian backlash.
($1 = 0.8651 euros)
(Editing by Balazs Koranyi and Larry King)