Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

ECB Warns European Banks May Need More Bad-Loan Provisions

Stock MarketsNov 25, 2020 10:00
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters.

(Bloomberg) -- Euro-area banks will probably have to set aside more money to soak up losses when government pandemic support ends and the economy grapples with massively increased debt, the European Central Bank said.

Provisions for losses on loans to companies are lower than in previous crises and below those seen in the U.S., the ECB said in its Financial Stability Review. That’s partly because measures by European governments and the central bank have reduced default risks, and partly because of weak profitability at banks.

The worry is that once emergency aid is pulled, some companies won’t be able to cover repayments, putting lenders under renewed stress.

“Provisions have increased but look optimistic in some cases,” ECB Vice President Luis de Guindos said in the review. “Guarantees and moratoria may have lengthened the time it takes for weak economic performance to translate into loan losses.”

Euro-area financial stocks declined on Wednesday, with the Euro Stoxx 600 Banks Index dropping 1.5% as of 10:40 am. Frankfurt time, underperforming the broader market.

The ECB also highlighted “stretched” valuations in some asset prices that raises the risk of a sudden drop hitting the financial system. That echoes warnings by the Federal Reserve and the International Monetary Fund this month of the risk to markets if the economic impact of the coronavirus worsens.

Government loan guarantees, debt-repayment holidays and tax deferrals have been key to weathering the biggest peacetime recession in almost a century, allowing companies to keep paying wages and maintain cashflows during enforced lockdowns.

The ECB has enabled that fiscal aid by keeping interest rates low with exceptional monetary stimulus, and plans to step up its actions again in December. It has also given banks regulatory relief, in return telling them to halt dividend payouts at least through the end of this year.

Executive Board member Yves Mersch, the vice-chair of the ECB’s bank-supervision arm, said in an interview with the Financial Times published Wednesday that ending the de facto dividend ban will depend on the “conservatism” of banks’ internal models and capital plans.

With vaccines closer to rollout and an end to the pandemic in sight, the ECB says public authorities face a delicate balance. They’ll shock the economy if they end pandemic support too suddenly, but undermine a necessary restructuring if they keep measures in place too long.

“There is a long road ahead,” Guindos said. “Government support schemes are essential currently but should remain targeted towards pandemic-related economic support and avoid giving rise to debt sustainability concerns in the medium term.”

Another immediate risk, the U.K.’s departure from the European Union’s single market on Dec. 31, is “mostly contained” after the European Commission allowed temporary access to critical derivatives clearinghouses in the U.K., the ECB said. The central bank also expects market participants in the EU to reduce their reliance on these firms, it said.

Longer-term, it said problems stemming from climate change shouldn’t be forgotten. Bank lending to carbon-intensive sectors -- a signal of exposure to such risks -- shows few signs of declining.


ECB Warns European Banks May Need More Bad-Loan Provisions

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email