Financial conditions in the euro area were mainly determined by monetary policy measures during the pandemic. Together with a supportive fiscal policy, they have mitigated the economic effects of the Covid-19 crisis. The banks were also able to operate in a more favorable environment as the regulatory requirements were significantly relaxed.
However, the end of the special rules for bankruptcies and risk prevention and the dismantling of public support programs in the aftermath of the corona crisis could reveal significant stocks of non-performing loans. Given the projected declines in output across the European Union, a deterioration in credit quality seems inevitable.
The European Central Bank (ECB) estimates that in an unfavorable but plausible scenario, the non-performing loans of banks in the euro area could reach a high of 1.4 trillion euros. This is likely to coincide with already poor profitability in the banking sector in the euro area, which could limit risk provisioning and the rapid recognition of losses.
In view of the experience after the global financial crisis and the European sovereign debt crisis, insufficient risk provisioning and a lack of settlement capacities within banks could slow down the settlement of private debts. Ultimately, it could thwart credit expansion and undermine economic recovery.
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The banks in the euro area significantly increased loan loss provisions in the first half of 2020, extrapolated to 0.76 percent of the loans on an annual basis. However, this provision is likely to lag behind the actual total credit default. This underlines the urgency of creating reliable and transparent financial data.
Viability endangered
Experience in various euro area Member States with high levels of non-performing loans has taught us that a lengthy restructuring process coupled with slow implementation of bankruptcy and bankruptcy reforms can lead to higher loan defaults and ultimately the viability of the underlying debtors endanger, especially companies.
The EU Commission listed such measures in its relevant communication of December 16, which facilitate the early booking of credit losses and the rapid adjustment of bank balance sheets through systemic solutions. We should learn the lessons of past crises and actually take these measures.
More: Investing in Corona times: What is important now for stockbrokers
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