Dhe European Central Bank (ECB) has taken a friendly course towards the 114 banks it directly supervises. On Monday evening, ECB chief supervisor Andrea Enria announced that he would give the institutions enough time to replenish their equity buffers, which were burdened in the wake of the corona pandemic. “We do not want to start again to tighten the reins on the capital buffers while the crisis is still hitting the balance sheets of the banks,” the news agency Reuters quoted Enria at an online event of the IESE Business School. The ECB plans that banks will be able to use their capital buffers flexibly until at least 2022. “But we can also reconsider the time path in the event that significant asset quality issues arise,” he added.
The Italian was alluding to possible loan defaults that could still threaten after the corona pandemic. For example, the Spanish central bank governor Pablo Hernandez de Cos warned on Tuesday at the same event of deteriorating credit on the balance sheets of Spanish banks as a result of the corona crisis. “There is still a risk of future credit quality deterioration,” said the Governing Council member.
De Cos pointed to industries that were particularly hard hit by the pandemic and the expiry of support measures. One of the sectors affected is tourism, which is particularly important for the Spanish economy. In almost all countries, retail and transport are particularly affected. Due to the state support measures, the credit moratoria and the suspension of the obligation to file for insolvency, it cannot be ruled out that the wave of corporate insolvency will occur with a delay. That is why Enria has always warned banks in recent months not to underestimate the risk of loan defaults.
The development in risk provisioning indicates that the banks are now seeing the extent of loan defaults much more relaxed than they were in the summer of a year ago. Furthermore, ECB President Christine Lagarde recently pointed out that the worst economic scenarios have become unlikely with the vaccination progress. That is why she and Enria announced a loosening of dividend restrictions last week, as the FAZ reported in its Saturday edition.
Risk appetite is a concern
For the banks, the “urgent recommendation” by the ECB supervisors was tantamount to a ban. It can be assumed that the overseers will want to abandon this tough instrument as the economic recovery solidifies. On the other hand, they are loosening the equity reins for banks so that they can support the economic upturn with loans. This also includes the continued relaxed calculation methods for the debt ratio. So deposits at the central bank and cash are excluded. This reduces the balance sheet total and thus the equity requirement.
The ECB banking supervisors are concerned about the banks’ increased risk appetite. That is why Enria announced a few days ago that it would take a closer look at complex financial transactions. The supervisors’ eyes are on risky takeover financing (leveraged loans) and equity derivatives.
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