Euro-area bank supervisors are looking at countries like Ireland with a history of tackling soured loans for hints on how to work out the €1.2 trillion bad debt pile that’s plaguing banks across the euro zone.

Non-performing loans remain a top priority for the European Central Bank, Daniele Nouy and Sabine Lautenschlaeger, who lead the ECB’s supervisory board, said on Wednesday.

As there’s no silver bullet, supervisors are settling in for years of work, learning from the countries with experience of the problem.

“You can see this quite clearly in the programme countries, for example, which did via the programs a lot of changes in their legal environment,” Ms Lautenschlaeger said, speaking of euro-area states that received aid packages.

“The time frame in which non-performing loans (NPLs) were then worked out decreased dramatically.”

Banks in the euro area are struggling to offload soured loans that are weighing on lenders’ balance sheets and stifling credit to support the fragile recovery.

Among crisis countries, Ireland offers a positive example on how to tackle the issue, Nouy said. She tapped Ireland’s head of banking regulation, Sharon Donnery, to lead a charge on tackling soured loans across the euro area. Ms Donnery, director of credit institutions at the Irish central bank, is leading a working group on resolving loans in partial or full default across euro-region banks. “Ireland has done a good job with the non-performing exposures,” Nouy said. “I’m surprised by what it has achieved by the starting of this journey.”

With blanket bad- bank solutions like in Slovenia or Spain now ruled out by state- aid restrictions, supervisors have to look at ways for the banks to sell the loans.

“The banks need to ensure that they have a market, for example, where they can sell their non-performing loans,” Ms Lautenschlaeger said.

“They need to ensure that they do have the right staff to do the work. Often you have to look into the legal systems – whether you can change, for example, the way how insolvency frameworks deal with non-performing loans.”

Most soured loans are concentrated in the region’s periphery, with banks in Italy, Spain, Ireland, Portugal and Greece accounting for over half of the euro area’s NPL burden.

Concern over swelling bad debt spurred a rout in banking stocks at the beginning of the year, partly complemented by the reaction to an ECB inquiry aimed at assessing the handling of distressed debt and identifying best practices. After months of discussion, Italy reached an agreement with the European Commission in February to allow banks to ease their burden of bad loans without breaching European Union rules.

The plan fell short of the creation of a national “bad bank” charged with taking over and managing distressed debt, the solution adopted by Spain during the crisis.

In Italy, supervisors requested a strict timetable for reducing deteriorated credit as part of its conditions for approving the merger of Banco Popolare SC with Banca Popolare di Milano Scarl.

In Greece, bad-debt reduction was part of the bailout deal reached with euro-area creditors in the summer of 2015. Supervisors now appear ready to dictate the pace for the unloading of non-performing loans themselves. “The ECB has worked extensively with banks in 2015, and continues doing so this year, to develop individual and tailored action plans,” Ms Nouy said at a hearing at the European Parliament in Brussels on Tuesday.

“While it will take some time to bring down bad loan stocks, good progress over the next few years can be expected.”

- Bloomberg