The European Central Bank (ECB) is concerned about the possible increase in bad debts (non-performing loans) and the risks this could pose to the balance sheets of financial institutions in the eurozone. In this sense, it requires “extreme caution” and asks banks to set aside money to face any difficulties that may arise due to the rise in interest rates and the uncertainty caused by the war in Ukraine, according to the report on surveillance priorities for the next three years, 2023 to 2025, released this Monday.
“The geopolitical shock caused by the invasion of Ukraine by Russia and its macro-financial consequences have increased uncertainty about the evolution of the economy and financial markets, as well as the risks for the banking sector,” the entity led by Christine Lagarde. And based on this scenario, he warns that “the current situation requires extreme caution from banks and banking regulators.”
Throughout the document, the ECB emphasizes on several occasions that banks should be alert to “early warning signs” regarding questionable credit, despite the fact that until the third quarter the volume of non-performing loans in the eurozone had fallen to a minimum of 1.8% . Moreover, according to preliminary surveillance data, the downward trend is expected to continue in the third quarter. However, Frankfurt technicians warn that higher interest rates coupled with a possible recession could hamper the ability of households and businesses to pay their debts.
The regulator explains that “the uncertainties and adverse risks associated with the current macro-financial and geopolitical environment materially affect the outlook for the European banking sector”. Therefore, “supervised institutions should be careful in developing and planning their management strategies to continue to closely monitor the risks associated with the rapidly changing financial environment and to focus their efforts on risk management”. To this end, it advocates the development of “solid capital, liquidity and financing plans that take into account the current outlook for uncertainty”.
Another risk Frankfurt points to is related to the end of the cheap money era and the “lack of diversification of funding sources and shortcomings in funding plans”.
As interest rates increase, banks will pay more to fund themselves. Incidentally, Lagarde is expected to announce another hike in the policy rate this week. At the same time, the ECB has withdrawn support measures aimed at facilitating banks’ liquidity and lending, in particular through targeted longer-term refinancing operations (so-called TLTRO) at very favorable rates. The problem? The deadline for repaying these loans is coming to an end. According to Reuters, banks will have to repay EUR 500 billion this year and the remaining EUR 1.3 billion in 2024. In addition to having to pay off these loans, banks will have to “replace part of the ECB’s financing with more expensive and possibly shorter financing”. conditions, which will put pressure on prudential ratios and profitability, especially in an environment of rising economic risks and a gradual tightening of monetary policy”.
Digitization and efforts to respond to climate change issues are other priorities on the agenda of the ECB’s Supervisory Board for the next three years.
confident national bank
Banks and the national regulator are confident that the sector is prepared for possible shocks with the increase in non-performing loans. In recent months, several voices in the industry have made national financial institutions more resilient today to face any unforeseen events that may arise with the possible recession expected in some countries from next year. “The homework has been done and the sector is better capitalized and has significant levels of liquidity,” as BPI CEO João Pedro Oliveira e Costa explained at the Money Conference, a conference promoted by DV, DN and TSF. A position shared by the other bankers. However, despite being confident, they guarantee attention to the evolution of the situation.
Source: DN
