The consequences of the pandemic will not be clear till 2021
According to a senior European bank official, the aftermath of the coronavirus pandemic will become more apparent among European financial institutions in the coming months and there could be a casualty or two in the sector.
Elke König, chair of the single resolution committee of the single resolution mechanism that oversees the restructuring of failing banks in the EU, said she expected the number of bad loans to rise in the region, which in turn would hit bank balance sheets.
However, when those loans peaked was the “$ 60,000 question,” said King.
“At the beginning (of the pandemic) in the spring, I would have thought that we could see the first real effects on the balance sheets in the third or fourth quarter of this year,” she told CNBC’s Annette Weisbach on Monday.
However, König stressed that some government support implemented at the beginning of the coronavirus crisis is gradually running out and therefore further damage to the European banking sector could become apparent in the course of 2021.
“Until the dust settles a bit, I would expect to see it in the third and second quarters of next year (a spike in NPLs) … Let’s be clear, this is a unique situation,” she said.
Stressing that this is not all a “Doom scenario”, she added, “We will see NPLs, but we will also see other industries do great.”
“We made it clear that banks should stand by, be sensible and keep their risk management up to date. As soon as they tackle an emerging problem, it’s better,” said König.
The purpose of the single resolution mechanism is to ensure the orderly resolution (or resolution) of failing banks in the region.
The SRM was launched in 2014 after the 2008/2009 financial crisis and the subsequent sovereign debt crisis in the euro zone. A key element of the SRM is the Single Resolution Fund, which is funded by contributions from the banking sector to help wind down failing banks and prop up the entire financial system.
The SRM is seen as an important pillar of the Eurozone’s banking union alongside the single supervisory mechanism (although other EU countries can join). The latter gives the European Central Bank the power to oversee the region’s banking institutions to verify that they comply with European banking regulations, meet capital requirements and are not prone to breakdown.
When asked if she would expect some bank defaults given the end of the support measures, König said she was “slightly optimistic that we won’t see a wave of bank defaults”.
“Why am I slightly optimistic? The ECB has carried out its (vulnerability) analysis, others have carried out similar stress tests. They show that after the financial crisis, the banks’ balance sheets have been cleaned up and revamped (and) have more and better capital. On average can we survive this kind of storm, “she said
Still, she added that “you can never rule out a mistake or two. Banks that were pretty weak may not come out stronger.”