The issue of the $425 billion payment holiday weighing on European banks

PARIS (Reuters) – More than 360 billion euros ($425 billion) in loans at Europe’s biggest banks have been subject to payment halts or other coronavirus relief measures, but the big question is whether borrowers will be able to resume payments when support ends.

FILE PHOTO: A man walks towards the European Central Bank (ECB) headquarters in Frankfurt, Germany July 8, 2020. REUTERS/Ralph Orlowski

Under the guidance of governments and regulators, lenders have given millions of consumers and businesses a break to help them deal with the financial fallout from the pandemic.

But it is not easy to determine what proportion of loans could go bad when the aid measures end, and therefore how much the banks will suffer losses.

Figures from the seven largest European banks that provided data on their relief measures at the end of the second quarter show that the value of outstanding loans subject to some sort of moratorium is around 15 times the total amount of provisions made for loan losses.

Graphic: payment holidays in brief

European regulators have said banks should not automatically set aside money to cover loans subject to payment disruptions if they have a certain degree of confidence that normal payments will resume, but this is proving difficult to assess.

Thomas Verdin, director of banking and regulation at BM&A, an independent audit and advisory firm, noted that some clients not in financial difficulty had requested short-term relief as a precautionary measure.

“You don’t know if the volume of loans under moratorium is a signal of financial difficulties,” he said.

Although second-quarter earnings calls were dominated by questions about the impact of loan moratoriums, banks said there were few signs of stress where payment holidays had already ended. .

Santander SAN.MC said that around 116 billion euros in loans had been placed on some kind of suspension of payment. Moratoriums on about a third of that volume had expired on July 15, with the vast majority of those loans still outstanding.

However, borrowers who choose not to extend payment holidays are those who are likely to be in a stronger financial position.

In Britain, initial offers of three-month payment breaks have already been extended once, with most now due to end in the fall.

Lloyds Banking Group, Britain’s biggest mortgage lender, said it is only in the coming months that they will get “a clearer picture of the underlying picture”.

The largest bank in Italy UniCredit IDRC.MI said that although it had made ample provisions for loans subject to moratoriums, it was unlikely to be able to make specific arrangements until next year.

But as a clearer picture emerges of the economic fallout from the crisis, the pressure on banks for clearer provisioning will increase.

“Timely classification and measurement of credit risk is essential for banks to provide confidence to supervisors and their stakeholders,” the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) said in a statement. article in May.

($1 = 0.8460 euros)

Reporting by Maya Nikolaeva; Editing by Kirsten Donovan