FRANKFURT AM MAIN: The eurozone’s big banks have successfully weathered the coronavirus crisis so far but could now be exposed to major losses on their loan portfolios, the European Central Bank said Thursday.
The ECB said that “deteriorating economic conditions” due to the coronavirus outbreak “slowed the pace of the ongoing reduction in non-performing loans”.
In addition, there was “also an embedded level of distress in loan books that is not yet fully evident”.
Combined with “the phasing-out of several support measures in 2021”, this exposure increases the “risk of cliff effects” and the ECB advised banks to follow guidance on precautionary steps.
The ECB said that compared to the global financial crisis of 2008-09, euro area banks began 2020 with “significantly higher capital levels and far greater resilience to economic deterioration”.
Unprecedented measures by governments have helped to shield companies and workers as well as the banking sector, averting a “pandemic-induced shock”, it said.
The central bank called banks’ capital buffers “ample” up to the third quarter of last year but warned that “significant uncertainties remain in the short- to medium-term”.
This would require “vigilance” as well as “continued supervisory challenges in several critical areas, relating in particular to the risk of a sudden increase in non-performing loans”.
It said that in the face of greater risk of default, it was encouraging “appropriately prudent approaches” with “a considerably higher number of recommendations to banks”.
ECB chief Christine Lagarde warned last week that the pandemic still poses “serious risks” to the eurozone economy as concerns grow about new virus variants and sluggish vaccination campaigns.
Under Lagarde, the ECB took unprecedented steps last year to cushion the eurozone economy from the impact of Covid-19.
Its biggest weapon is a pandemic emergency bond-buying scheme, known as PEPP, that was in December topped up by 500 billion euros ($606 billion) to reach a total envelope of 1.85 trillion euros. The scheme was also extended to March 2022.
The bank has also offered ultra-cheap bank loans and held interest rates at historic lows to bolster the economy.
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