The European Union unveiled plans to assist countries in setting up a network of national “bad banks” to help cope with a possible avalanche of defaulted loans triggered by the pandemic.

Bad banks—private or government-funded repositories that soak up soured loans—are seen as a way to help Europe’s creaky banks navigate the Covid-19 downturn and be strong enough to lend during the recovery. The European Central Bank, which supervises the largest banks in the eurozone, has warned banks could be facing $1.7trn in bad loans under an extreme, yet possible, economic scenario.