ECB warns of higher loan losses and funding squeeze for eurozone banks

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The European Central Financial institution has warned that eurozone banks are liable to mounting dangerous loans and a funding squeeze as a result of rising rates of interest, increased inflation and a probable recession.

Supervisors on the ECB plan extra frequent inspections of financial institution places of work and can perform extra “focused opinions” of the biggest lenders within the 19-country single forex zone to push them to deal with these rising dangers, the regulator mentioned on Monday.

Publishing its priorities for banking supervision subsequent yr, the ECB mentioned lending to energy-intensive sectors, residential mortgages and industrial property was significantly susceptible to the deteriorating financial surroundings.

Some banks may additionally battle to switch a budget funding the ECB has supplied to assist the sector by way of the coronavirus pandemic, which is now being withdrawn because the central financial institution tightens financial coverage to sort out excessive inflation, it mentioned.

“Whereas the banking sector has up to now confirmed to be resilient to the fallout from the conflict in Ukraine, draw back dangers have elevated in consequence,” mentioned Kerstin af Jochnick, an ECB supervisory board member, and Mario Quagliariello, its director of supervisory technique and threat.

“Within the close to time period, we’re involved concerning the repercussions of the macroeconomic surroundings and monetary market dynamics for asset high quality and banks’ funding,” they mentioned in a blog printed on Monday.

The elevated strain from the ECB over banks’ preparation for a possible enhance in dangerous loans and funding squeeze may enhance tensions with executives within the sector, a number of of whom have already complained about its heavy handed strategy to supervision.

The banking sector’s efficiency has picked up this yr, as rising rates of interest have boosted revenue margins on loans whereas authorities measures to help firms and households with excessive power prices have helped to maintain defaults low.

Nevertheless, the ECB warned that the great occasions regarded unlikely to final as a result of a possible enhance in dangerous loans and rising funding prices for banks. 

The central financial institution is anticipated to raise interest rates on Thursday by no less than 0.5 proportion factors to 2 per cent, which might be the best degree for the reason that 2008/9 monetary disaster, whereas most economists anticipate the eurozone to enter a recession this winter.

“Larger rates of interest and a sluggish or presumably recessionary progress outlook could problem the debt-servicing capability of debtors going ahead,” the ECB officers mentioned of their weblog. “This may occasionally significantly be the case for extremely indebted households and corporates.”

The central financial institution mentioned a latest supervisory evaluation had recognized shortcomings in how banks management their dangers, “particularly in relation to mortgage origination and monitoring, classification of distressed debtors and provisioning frameworks”.

Some banks have additionally change into “extra susceptible to market disturbances” due to a heavy reliance on ultra-cheap funding from the ECB itself, the central financial institution warned. 

Final month, the ECB modified the phrases of its focused longer-term lending operations, beneath which it lent €2.1tn to banks at a price as little as minus 1 per cent to encourage them to not minimize their lending in the course of the pandemic.

The TLTRO price was raised to the ECB’s deposit price from final month and since then banks have repaid practically €800bn of their loans beneath the scheme forward of schedule.

The central financial institution mentioned some banks would wish to “additional diversify their funding sources and exchange a part of their central financial institution funding with dearer and presumably shorter-term options, which can put strain on their prudential ratios and profitability”.



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