Exclusive: Italy's central bank asks ECB to soften bad-loan plans - source

By Stefano Bernabei

ROME (Reuters) - Italy's central bank is calling on the European Central Bank to soften new requirements for banks to set aside more capital to cover newly classified bad loans, a source told Reuters.

Italian banks hold nearly 30 percent of the euro zone's 915 billion euros (838.54 billion pounds) of problematic debts and investors are concerned new ECB guidelines announced on Wednesday will lead to further writedowns of soured loans.

The source, who is close to the Bank of Italy, said it wanted secured loans to be exempted from the new rules, challenging one of the main planks of the ECB guidelines, which are the subject of a public consultation until Dec. 8.

Italian bank shares fell for a second straight day on Thursday following the proposals, which several analysts said bode ill for the country's lenders.

"This is a crazy and suicidal choice," former prime minister Matteo Renzi, who heads the ruling centre-left Democratic Party, said in a letter posted on his Web site.

"With the mechanism they want to force on us, it will be almost impossible to lend to small- and medium-sized companies. And it will hurt other banks, other account holders, other savers," he said.

The ECB's guidelines say that starting on Jan. 1, banks will have at most two years to set aside funds to cover 100 percent of their newly classified non-performing unsecured debt and seven years to cover all secured bad debt.

Secured loans account for nearly half of the worst kind of bad debts weighing on Italian bank balance sheets.

The Bank of Italy also wants to make sure that existing bad loans are not affected by the new rules, the source said.

Italian business lobby Confindustria also said the proposed rules risked provoking a credit crunch, calling them "an incomprehensible choice".

EXISTING LOAN FEARS

The guidelines are to apply to loans newly classified as impaired from Jan. 1 next year, but Italy fears they could be extended to apply to all existing bad loans.

The ECB has said it would come up with new rules on treating legacy assets before the end of the first quarter of next year.

Its proposal argued that if a bank was unable to realise collateral after seven years, it should be deemed ineffective and thus the loan should be treated as unsecured, even if the delay was for reasons outside the bank's control.

It declined to comment on the Bank of Italy's request to exclude secured loans from the new rules.

The source said it was necessary to avoid guidelines that did not take into account different economic growth positions and the length of credit recovery procedures among euro zone countries. The average recovery time for a bad loan in Italy is around seven years.

The Bank of Italy hopes that the consultation process will lead to a balanced version of the measures, the source said, although ECB consultations of this type do not usually result in fundamental changes to the original proposals.

(Additional reporting by Balazs Koranyi; Writing by Silvia Aloisi; Editing by Mark Bendeich and Alexander Smith)