By Jan Strupczewski
BRUSSELS (Reuters) - European Union banks have cut bad loans and raised provisions, the European Commission said on Wednesday, before EU finance ministers decide next week when to introduce an EU deposit guarantee scheme that hinges on lower risk in banks.
The European Deposit Insurance Scheme (EDIS) would guarantee that the holder of a deposit of up to 100,000 euros (88,396.15 pounds) in any bank in a euro zone country would always get it back in case of a bank collapse.
But while this would boost confidence in the banking sector and help prevent bank runs, Germany and some other northern European countries say it can only be introduced once banks in various countries become safer by reducing existing risks.
One of such key risks is the number of non-performing loans a bank has, often a legacy of the financial and euro zone sovereign debt crises, and the size of provisions made for them.
European Union finance ministers are to decide on Monday on a roadmap for beginning political discussions on EDIS as well as other reforms to deepen economic integration between the 19 countries sharing the euro.
"Working out the high stocks of non-performing loans is part of efforts to reduce risks in the European banking sector," Commission Vice President Valdis Dombrovskis said.
"On the basis of the progress achieved on the risk-reduction side, I invite EU Finance Ministers and leaders to agree on concrete risk-sharing measures in December," he said, referring to EDIS.
The Commission said in a report the ratio of bad loans in all EU banks fell to 3.4 percent of all loans in the second quarter from 4.6 percent a year earlier, and stood at 820 billion euros in absolute terms.
According to World Bank data the global average for bad loans in 2017 was 3.7 percent of all loans.
But the EU average masks large differences between countries -- in Greece 44.9 percent of all loans are bad, in Cyprus 28.1 percent, in Portugal 11.7 percent and in Italy 10.0 percent.
The Commission said the provisioning ratio has also improved to 59 percent and that the longer term trend indicated that the bad loan ratio was approaching pre-crisis levels again.
To help better deal with economic shocks and crises, the EU is also building what it calls a capital markets union (CMU), which would make it easier for investors, companies and individuals to borrow and invest across the EU.
"The Capital Markets Union is about broadening access to finance for small and medium size companies, and to increase investment opportunities in Europe," Commission Vice President Jyrki Katainen said.
"This is why we count on the support of the European Parliament and the Council to agree swiftly on the outstanding measures we proposed under the Banking Union and Capital Markets Union agenda," he said.
(Reporting By Jan Strupczewski; editing by Philip Blenkinsop)