ECB still concerned about existing stock of bank bad loans: Mersch

By Valentina Za and Gianluca Semeraro

MILAN (Reuters) - The European Central Bank is still concerned with the stock of bad loans clogging up bank balance sheets in the euro zone, ECB Executive Board member Yves Mersch said on Monday.

The ECB last week issued new proposals that will force banks from 2018 to set aside more cash to cover newly classified bad debts and may also present additional measures to tackle the sector's huge stock of soured debt.

Italy - whose banks hold nearly 30 percent of the euro zone's 915 billion euros of bad loans - has reacted angrily to the new measures, asking the ECB to soften them following a public consultation that will be held until Dec. 8.

"Since we have found already a solution for non-performing loans going forward we are still concerned we have to deal with the existing stock," Mersch told a conference in Milan when asked about Italy's concerns over the new measures and whether they will apply only to new NPLs.

"If we have rules in Europe, we cannot always put forward cultural exceptions, especially if these cultural exceptions are ... home-made," he said.

Mersch said the proposed rules were not aimed at a particular country. He acknowledged bad loans were a bigger problem for some countries, but said this was for domestic reasons.

Lengthy recovery procedures put Italian banks at a disadvantage as the new rules require banks to set aside cash at regular intervals against loan losses.

"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."

Mersch also rejected criticism by Italian officials who said the ECB guidelines could cripple credit.

"Our intention is not to reduce the ability to lend but to have a healthy banking system."

Asked about 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 Richard Balmforth)