October 24, 2020

The Banking Authority warns that delinquencies can skyrocket to levels of the latest crisis




With the Covid-19 crisis still boiling, the European Banking Authority (EBA) It has sent a message of calm – albeit with nuances – about the future of the sector. The institution today presented its preliminary report on the impact of the coronavirus in the sector and the conclusion, broadly speaking, is positive. The big warnings: that the authorities of each country act as soon as possible in the face of the problems of the weakest banks and that delinquencies can skyrocket to the levels of the latest crisis.

Despite the fact that it is not a study by specific entities or countries, the EBA highlights in its document that supervised European banks arrive with more muscle at this situation: capital and liquidity levels have improved compared to other crises and concludes that the entities are facing this uncertain scenario at a better time than before the great recession of 2008. Thus, the report shows that the CET1 solvency ratio it has gone from 9% in 2009 to 15% at the end of the last year; and with regard to the LCR liquidity ratio – whose minimum coverage ratio required by the EBA for banks with an international presence is 100% -, it stands at 150%, well above what is claimed in the regulations.

However, it is not all good news. The institution, although celebrating the strength of the sector in these times, warns that the Covid-19 will have a significant negative impact on the quality of the assets of each bank, although everything will depend on the degree of exposure that each entity has to each asset type. In this sense, as experts also foresee, delinquent loans will increase, “which can reach levels similar to those recorded as a result of the sovereign debt crisis.”

Currently, in Spain the default rate is around 4.8%, according to figures from the Bank of Spain. A reduced percentage compared to the stage of the debt crisis, when it closed 2013 with a delinquency of 13.6%. The tranquility in this regard is now relative, having ended the month of March with 57,340 million euros in doubtful loans. The EBA, thus things, considers that the banks have enough capital to face future defaults, which are expected to increase in the medium term. And to all this it should be added that the institution estimates that the state guarantees that are being granted to grant credit also represent a cushion to prevent the problem from escalating.

Monitor weaknesses

This is the big picture in a preliminary report, but the Banking Authority does not lose its eye on the specific entities. Although without names, the EBA calls on supervisors in each country: “The competent authorities must quickly address any idiosyncratic weaknesses that may be exacerbated by the current crisis.” They refer to keeping a close watch on those entities that may present greater weaknesses in terms of solvency or liquidity because this is how they came from before the crisis or because they were exposed to more damaged sectors. As a possible solution, as indicated in a technical briefing with the media, is the possibility of addressing the aforementioned mergers of entities.

All this also without losing sight of bank profitability, which does not finish taking off. In fact, the Bank of Spain has already alerted national entities on several occasions that they have to diversify their sources of income so as not to depend so much on the interest margin. The EBA adds to the warning of a reduced profitability, which it expects to persist over time due to the maintenance of margins as a result of the monetary policy of stimuli from the European central bank.


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