12 November 2020

FT: EU banks urged to prepare for bad loans as pandemic hits economy

Head of body responsible for winding down failing lenders issues warning. European banks need to prepare their balance sheets for the risk of pandemic-induced non-performing loans hitting them in the new year, the head of the EU agency tasked with winding down failing lenders has said.

European banks need to prepare their balance sheets for the risk of pandemic-induced non-performing loans hitting them in the new year, the head of the EU agency tasked with winding down failing lenders has said. Elke König, chair of the Single Resolution Board, rejected suggestions from the European Central Bank that the EU needs to set up a network of “bad banks” to handle higher non-performing loans (NPLs), but she warned banks needed to do intensive work to sort out viable loans from unviable ones.

In an interview with the Financial Times she also urged the EU to properly harmonise its state aid rules for handling embattled banks with its “resolution” regime, which intervenes to ward off systemic financial crises. Ms König argued that as things stand there was a “misalignment” in the system.

The SRB was set up following the eurozone sovereign debt crisis to wind down stricken banks while securing financial stability and consistent treatment of the region’s lenders. But with regulators now weighing the risks of a surge in NPLs, the agency is still working with an incomplete system of EU bank-crisis rules which must operate over a patchwork of different national arrangements.

Last month, the ECB’s top bank supervisor Andrea Enria wrote in the FT that, in a “severe but plausible” scenario, non-performing loans at eurozone banks could reach €1.4tn, well above the levels of the 2008 financial crisis and the ensuing EU sovereign debt crisis. Ms König said it was too soon to know how bad the situation with NPLs would get, because this would depend on the nature of the downturn and recovery.

Current actions by governments, such as state guarantee schemes, were “shielding” the lenders, she added. In June 2017, the Single Resolution Board transferred all shares of Spain’s Banco Popular to Santander © Angel Navarrete/Bloomberg But she said that non-performing loans could start coming through in the first and second quarters of next year. ....

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