Press play to listen to this article
Banks are approaching a bad debt calculation day despite government measures to ease the blow to borrowers.
Government guarantees, payment holidays and worker wage support have delayed the pain of lenders by helping businesses and households weather the pandemic.
But these measures also complicate the situation for European banks, which are under pressure from regulators to assess the real damage done to their balance sheets.
Andrea Enria, the top banking supervisor in the euro area, has warned lenders that “now is the time” to identify borrowers in arrears and reclassify loans on a case-by-case basis.
The chairman of the supervisory arm of the European Central Bank has repeatedly stressed that swift action on bad loans can prevent a build-up from clogging balance sheets and hampering lending as has happened in crises. past.
Still, the Italian also acknowledged that the public support measures mean banks are “stealing blind” on nonperforming loans. The possible impact is difficult to assess.
“We know that NPLs will increase and we are bracing for that impact, but we don’t know exactly when that will materialize,” he said on Wednesday at a European Savings and Retail Banking Group conference. (ESBG).
Enria is not the only regulator urging lenders to act now.
“The impact on banks, ie non-performing loans, will most likely take a few more quarters to be felt, given the current high level of government support for the real economy,” Elke König , President of the Single Resolution Board Told European lawmakers this week. She described state aid as “protection” of the banks.
“My message to the banks is clear,” she said. “Banks need to put in place measures to identify and address NPLs, as early as possible, and careful provisioning has never been detrimental.”
Surf the wave
Ironically, the second wave of the coronavirus – which is once again shutting down economies across Europe – could give policymakers more time to craft a downgraded loan plan.
Sustained government support for hard-hit businesses may further delay when the fallout from COVID-19 manifests in bank bottom lines.
ECB valued in July, state guarantees would absorb € 42 billion in losses for banks in its most severe scenario. Extending those guarantees by six months until mid 2021 could absorb an additional € 18 billion, he said.
“Although national governments are able to keep these guarantee programs, I think we have time to analyze what we need to do from a European point of view,” said Jonás Fernández, coordinator of the Socialists at the Economic Commission of the European Parliament, in an interview. .
Yet Spain’s EU lawmaker has warned that the surge in bad debts is still happening, and legislative steps should be taken in anticipation, such as the creation of a failing European bank to which bad debts can be transferred. He said: “We can’t wait to see the problem moving forward. “
Enria also relaunched this week his call – dating back to his time as head of the European Banking Authority – for a European vehicle, or a network of nationals, to buy out questionable assets.
Some officials in Brussels say the timeline has slipped on a European Commission action plan for bad loans, initially expected in November, due to the second wave of coronavirus infections that have dampened economic recovery.
A Commission spokesperson said a “new comprehensive NPL strategy” will come before the end of the year, focusing on a mix of political actions. Highlights will include restructuring, insolvency and debt collection frameworks, as well as developing markets for lenders to sell loans off their books.
This may include policy options proposed at a roundtable in September, such as the network government “bad banks” to collect overdue loans.
There is always a possibility that such vehicles may not be needed if enough borrowers are able to restart loan repayments when government support finally ends.
John Dugan, chairman of Citigroup, told the Institute of International Finance conference earlier this month that his bank recorded lower losses on its credit card business in the third quarter compared to the same period in 2019. Many banks have reported more recently. inferior provisions against loan losses.
For Citigroup, those losses are still likely to materialize, Dugan said. “They will come and it will happen later and this has been very affected by the government tax measures by postponing the day of the accounts.”
Still, Dugan added that it’s not clear whether this ‘judgment day’ will strike as the pandemic worsens, or when the economy improves, so banks won’t have to tap into it. in all their reserves for losses. “Great uncertainty about it,” he said.
This article is part of POLITICOThe premium policing service of: Pro Financial Services. From the Eurozone, the Banking Union, the CMU and more, our specialist journalists keep you up to date on the topics that govern the political agenda of financial services. E-mail [email protected] for a free trial.