European banks stronger, but some may not weather crisis, regulator says

European banks have built up enough reserves to weather the effects of the coronavirus pandemic, but not all will be able to weather a sharp drop in profitability as lending turns sour and the cost of raising money funds are rising, a banking regulator said Monday.

In its first assessment of the effects of coronavirus on the sector, the Paris-based European Banking Authority said banks had far more capital to absorb losses than before the financial crisis. But they are also more exposed to small and medium-sized businesses and consumer credit, two areas that offer higher margins in a low rate environment but are now being hit hard by the virus outbreak.

The EBA said that, based on a sensitive analysis of 117 banks in the European Union, the impact of credit risk losses on their main capital ratio – known as CET1 – could reach 315 billion euros ($343 billion). Yet banks would hold, on average, a capital buffer of around 1.1 percentage points above the overall capital requirement.

“There could be weaker banks, including those that entered the crisis with existing idiosyncratic problems or those that are heavily exposed to the sectors most affected by the crisis, and whose capital ratios may not be sufficient. face the challenges ahead,” he warned.

EBA chief Jose Manuel Campa told Reuters on Monday that Europe should consider a common approach to help banks that will face difficulties, possibly in the form of a TARP-style precautionary recapitalisation. The TARP, or Troubled Asset Relief Program, was used by the United States in 2008 to inject money into banks.

An EBA spokeswoman said the regulator would like to see a coordinated European approach in areas ranging from state guarantees on loans to the potential use of any recapitalization mechanism. Any discussion of supporting banks now “is hypothetical and unnecessary”, she added.

The EBA said its analysis on banks, which is preliminary, did not take into account the impact of market or revenue risks. Its calculation of credit risk losses also does not take into account the beneficial effects of government guarantees on loans, which reduce credit risk for banks.

Overall, European banks reported no deterioration in their loan portfolios during the first quarter, which ended March 31. But the EBA and other regulators said the situation would change from the second quarter.

Lenders, especially in southern Europe, were cleaning up credit that went bad during the crisis of the last decade when the coronavirus arrived. In Italy, they still represent around 7% of total loans. In Greece, they are above 35%, according to the latest figures from the European Central Bank.

On funding, the regulator said deposits have been stable since the start of the crisis, but banks are likely to increase their reliance on cheap central bank loans as it has become more expensive. exploit the market to raise debt.

About 20% of the debt issued by the banks in the sample analyzed by the EBA will mature within the next six months, and another 10% within a year, he said. “This could indicate short-term pricing and profitability issues for banks,” the regulator warned.

Write to Patricia Kowsmann at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8