ECB Concerned That Euro Banks Are Unprepared For Spate Of Bad Loans

The European Central Bank (ECB) is concerned that regional banks are not setting aside as much money as other countries to cover loan losses stemming from the ongoing pandemic.

The ECB’s Head of Banking Supervision Andre Enria said on Thursday (Jan. 28) that the central bank was worried eurozone banks were setting aside even less money for losses than they did during the financial crisis earlier this century, according to The Wall Street Journal.

“The way in which banks are preparing for asset quality deterioration varies widely and could, in some cases, be insufficient,” Enria said. He added that he expects to see the effects of a second round of lockdowns reflected in upcoming fourth quarter and 2020 year-end earnings.

Many of the region’s big banks are expected to report earnings next week.

The ECB said early in the pandemic that the region’s loan failure rate could rocket up to €1.4 trillion, or $1.7 trillion. While the central bank has dialed back that number in recent months, it says the threat of widespread loan defaults is still significant.

The Journal noted that it has been difficult to gauge the financial health of European borrowers because of the considerable financial support they have received from the ECB and local governments during the pandemic crisis, including ongoing loan repayment moratoriums.

The situation is exacerbated by the continued issuance of state-guaranteed loans to struggling businesses. Enria said that because of the state guarantees, there are concerns that lenders haven’t been adequately screening certain borrowers. He added that the ECB has been telling banks to develop additional screening indicators, but that many banks have yet to do so.

That said, an ECB survey released in mid-January showed that European lenders were scaling back lending, in part over concerns about borrowers’ creditworthiness.

Further concerning bank regulators are signs that the second surge in COVID-19 infections is pushing the eurozone into a second pandemic recession. A recent report by IHS Market said that its Purchasing Managers Index for the eurozone region slid to below 50 points in December and January, indicating that another recession was taking root.