DrThe President of the European Central Bank (ECB), Christine LagardeI did not go too far in praising the ECB’s banking supervision and operation. She used her opening speech at the European Central Bank’s Banking Supervision Conference on Tuesday to urge banks to exercise extra caution when dealing with credit risk. Because it is currently too early for Lagarde to provide all the clarity. The full effects of the pandemic will only become apparent gradually and could challenge credit risk management.
Government relief measures and regulatory relief may have obscured the basic creditworthiness of debtors. If these measures expire and the actual financial position of the companies is disclosed, it may affect the credit quality. Lagarde pointed to key indicators such as deferred loans, which were already pointing to a decline. The final impact on non-performing loans could only be determined after a delay of several years, and this depends on the dynamics of the economic recovery.
“We are very vigilant,” said Ana Botín, chair of the board of directors of the large Spanish bank. Santander. According to her, the focus is primarily on the sectors that have been hit hard by the epidemic. This includes tourism, which is very important for Spain and which has been particularly restricted to lockdowns. At the same time, Putin stressed that not all areas of the economy had suffered from the epidemic.
Margin effect prevails
Andrea Enria, head of banking supervision at the European Central Bank, spoke about the ultra-low interest rate environment. Too deep interest fee In the meantime, it will burden European banks more than it benefits them. According to the Italian, this negative impact on interest rate spreads is likely to persist for some time. “It is true that the margin effect has been prevalent lately,” Enria said. He pointed out that the banks succeeded in offsetting the negative interest impact through trading income and higher commission income. Despite the diversity of the sources of income, banks will have to handle the burdens of very low interest rates while taking into account their cost structures and business models.
Enria mentioned again how he saw the need to complete the European Banking Union. In her speech, Lagarde also earlier pointed out the importance of common rules in order to avoid regulatory arbitrage. Enria made explicit reference to Europe’s joint deposit insurance scheme, which could also facilitate cross-border movement of capital and liquidity between parent companies and affiliates of a banking group.
Combined deposit insurance has faced resistance in Germany so far because it requires reducing the number of loans at risk of default on banks’ balance sheets. This is to avoid sharing risks. Lagarde referred to the successes of European banking supervision, for which EZB responsible. Since then, the return on equity has increased dramatically and non-performing loans on balance sheets have been reduced by about 50 percent. Her predecessor Mario Draghi, now head of government in Italy, where banks remain saddled with bad loans, had already advocated for the Common European Deposit Insurance Scheme.
Enria praised European banks for using the pandemic to address deep-rooted issues that have dented their profitability vis-à-vis US competitors. Your profitability has developed well lately, he was satisfied.
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