The Eurozone’s banks are likely to have to put aside more cash to pay for loan losses as the recovery from the coronavirus crisis enters a new stage, the European Central Bank (ECB) has said.
“Bank profitability is expected to remain weak. Provisions have increased but look optimistic in some cases,” said Luis de Guindos, vice president of the ECB.
The verdict was part of the ECB’s latest financial stability report. It warned that the sharp rise in company indebtedness posed a risk to banks, who are potentially exposed to losses.
It said that the premature withdrawal of economic support could well lead to companies struggling to pay their debts.
The report comes as the Eurozone economy struggles with a second wave of coronavirus infections. Countries have once again put strict lockdown measures in place which threaten economic growth.
ECB policymakers have repeatedly called for states to keep up their economic support. It has also urged the EU to find a way past disagreements over the €750bn (£670bn) coronavirus recovery fund.
Banks’ buffers ‘remain comfortable’
The central bank today stressed that euro area banks entered the pandemic with stronger balance sheets than before the financial crisis.
It said that “banks’ capital buffers remain comfortable”. And it said they “should remain available to absorb losses and support lending for an extended period”.
As part of its crisis-fighting efforts, the ECB has effectively ordered banks to stop paying dividends so they can preserve capital levels.
Guindos told reporters today a decision about whether or not to continue the ban will be taken in December.
In the report, Guindos stressed that loan loss provisions could have to rise again. He said that “guarantees and moratoria may have lengthened the time it takes for weak economic performance to translate into loan losses”.