The EBA believes that European banks have a cushion to cushion losses

The European Banking Authority (EBA) considers that the sector is more prepared to face the economic shock of the coronavirus than in the financial crisis of 2008-2009, especially because it has a capital and liquidity buffer that allows it to face the risk of credit.

In a preliminary report published this Monday, the EBA is cautious about the uncertainties they continue to plan but stresses that the capital accumulated in recent years, added to the measures activated since March by the regulators, "should allow banks to bear the possible credit risk losses. "

Based on the assumptions of the last stress tests he carried out in 2018, he calculates that credit risk could mean losses of between 2.3 and 3.8% of risk-weighted assets.

Taking into account that globally entities have a buffer of around 5% of risk assets, that should give banks a margin of at least 1.1%, so the sector as a whole is considered "resilient" .

However, the EBA points out that there could be some weaker entities, among which those that have entered the crisis with specific problems and those that are highly exposed to sectors more sensitive to the shock of the coronavirus (such as accommodation, catering or transport) , for which the capital buffer may be insufficient.

In its analysis, it does not consider other risks that could also impact the banking sector, such as the one that could come from an eventual collapse of the markets.

Above all, he insists that the global economy faces "unprecedented" challenges and that, unless there is an effective vaccine, the distancing measures imposed by the authorities are going to be lifted at a gradual rate and there is a risk that new outbreaks of the epidemic occur.

The consequence of all this is that the economy "may take longer to recover than initially expected."

To demonstrate the best foundations for European banking, the banking authority stresses that its highest quality capital ratio (CET1) was 14.9% in December last year, compared to 9% in 2009, when it had to face the financial crisis.

In parallel, the liquidity level is clearly above the regulatory minimums, specifically at almost 150% in the first quarter of 2020. In addition, delinquent loans (with defaults that last for at least three months), which arrived to represent 7% in 2014, they had dropped to 3.1% at the end of last year.

The EBA highlights that the banks have managed to continue operating despite the impact of the pandemic without their essential activities being barely affected, with extensive use of teleworking and digital channels.

Despite these improvements and achievements, the regulatory body recalls that the profitability of the banking sector had not recovered since the financial crisis as a result of low interest rates and high structural costs.

He notes that banks are using liquidity buffers and should continue to use them in the coming months because financing conditions in the markets have deteriorated significantly since February.

For this reason, it has increased its dependence on the European Central Bank (ECB) when it comes to financing itself.

In its report, the EBA makes a global analysis of the European banking sector based on a sample of 117 entities, without entering into the individual situation of each of them or of each EU country.

Faced with the economic shock caused by the covid-19 pandemic, the banking regulator decided to postpone its stress tests initially scheduled for the end of July until next year so that the entities could deal with the immediate urgency of managing the crisis.

In June, it will publish, in any case, the results of a transparency exercise, with individual data from the banks examined.


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