In view of the expected loan defaults as a result of the Corona crisis, the banking supervisory authority of the European Central Bank (ECB) is pressing ahead with a specific proposal to relieve the financial institutions. The advance of the ECB chief banking supervisor Andrea Enria (59) intends to use state support in Europe to drive the reduction of bad loans in bank balance sheets, as he explained on Tuesday at an event on European banking regulation.
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Among other things, this is intended to prevent the institutes from being able to sell their wobbly loans to specialized investors only at low prices. Enria initially presented his idea in October, but was not very concrete at the time. A spike in non-performing loans would be a big problem for the economy amid the coronavirus crisis. Because institutions act more hesitantly when granting loans, the more wobbly loans they drag with them on their balance sheets. “It is about enabling banks in the EU to support viable households, small businesses and businesses,” said Enria.
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Shaky candidates, especially in former EU crisis countries
The Bundesbank expects more corporate bankruptcies in the coming year and thus a significant increase in loan defaults for banks. The loan defaults for German banks are likely to quadruple to 0.8 percent of the loan portfolio at the beginning of 2021, while the charges add up to around 13 billion euros, the Bundesbank calculated in mid-October. However, a significantly stronger increase in bankruptcies cannot be ruled out.
At European level, reported “The world” Recently, citing an internal paper by the EU Commission, the balance sheets of banks in former crisis countries in particular represent a greater risk. Despite all the clean-up work, they are still weakened and therefore more susceptible to the impending bankruptcy wave. In Greece, for example, more than a third of all outstanding loans were at risk of default in the first quarter. In Cyprus, the proportion was 18 percent. In Italy, a little more than 6 percent of outstanding loans are at risk of default, in Latvia, Ireland and Spain less than 5 percent, it is said.
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Asset managers should buy and sell bad loans
The proposal by ECB chief banking supervisor Enria now envisages the establishment of a European association of asset managers who will take their bad loans from the banks and sell them on the market. According to Enria, the financing will be supported by European funds.
At the same time, the pricing for the transfer of the loans should be regulated at European level. That would also benefit asset managers. “Funding provided or guaranteed by a European body would allow any national asset manager to benefit from the EU’s creditworthiness and enjoy better market access,” said Enria.
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In the event that the companies should end up in the red, it could be agreed, according to Enria, to limit or even exclude the mutualisation of credit losses in the EU. Losses would then be distributed to the respective country of origin of the bank according to the national procedures.
According to Enria, only banks with a business model that is viable from the supervisory perspective, even after the Corona crisis, should have direct access to the network. For other institutes, access is to be linked to strict conditions such as restructuring requirements.
Bafin warns: Many financial institutions are too relaxed about loan defaults
The financial supervisory authority Bafin warns the banks against too much carelessness in the corona crisis. Many financial institutions are still deeply relaxed on the subject of loan defaults, said Bafin Executive Director Raimund Röseler on Tuesday. “The new lockdown has increased skepticism a bit, but many banks still do not see great risks, which I personally find astonishing,” said Röseler at an event organized by the “Handelsblatt”
Other institutes, on the other hand, are very skeptical and tend to share the supervisory authority’s view that the state aid programs and changes in bankruptcy law have gained time. “The corona crisis will have painful consequences for many banks,” warned Röseler, who is responsible for banking supervision at Bafin. One or the other institute will disappear from the market, but he does not expect a systemic banking crisis.
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