A harbinger of a bank default in the Eurozone… a rise in crisis debt rates

The European Central Bank has warned that the balance sheets of euro zone banks are showing “early signs of stress”, after a rise in defaults and loan delinquencies.

Officials at the Central Bank urged lenders to increase provisions to cover increasing loan losses, and they expected that their profits would be harmed due to the decrease in lending volume and increased financing costs.

The European Central Bank has raised interest rates ten times in a row since the middle of last year, reaching unprecedented levels of 4.5%.

The central bank said in its twice-yearly financial stability review, according to a report by the British Financial Times newspaper, yesterday, Tuesday: “A longer period of rising interest rates is likely to lead to an increase in provisions, which in turn will constitute a burden on banks’ profitability in the future.”

Despite warning of the repercussions of borrowers defaulting on debts, the bank noted that the banking system is “well positioned” to deal with deteriorating asset quality due to “strong capital and liquidity” levels and high profitability, which recently reached its highest level in more than a decade. .

The system remained resilient during the sector’s turmoil earlier this year, when several US and Swiss banks, including US Silicon Valley and Credit Suisse, collapsed or had to be bailed out.

European Central Bank Vice President Louis de Guindos said that although “the risks to financial stability may seem less severe, they remain high,” pointing to the impact of weak economic growth, tightening financing conditions, and rising loan defaults. Real estate markets declined.

“The escalation of conflict in the Middle East could lead to a sharp increase in risk aversion in financial markets, exposing prevailing vulnerabilities,” De Gendos added, “by disrupting energy markets, undermining confidence, slowing growth, and pushing inflation higher.”

The ECB has identified three main “headwinds” to banks’ profitability: increasing funding costs as higher interest rates are passed on to depositors, increasing loan defaults as the economy weakens and debt servicing costs rise, and “a significant reduction in lending volumes”.

“Delinquency rates began to increase, and the share of loans that were less than 90 days past due also increased,” he said. He warned that this trend would likely “translate” into an increase in non-performing loans.

The level of non-performing loans in the eurozone banking sector has fallen steadily to approximately 2% of total loans, after peaking at 7.5% at the height of the region’s debt crisis a decade ago. But the central bank said the recent decline in European property markets had led to an increase in non-performing loans, in both loans to commercial property companies and residential mortgages.

“Countries with predominantly variable interest rates are likely to see a more pronounced deterioration in asset quality in the future if the labor market weakens significantly, increasing pressure on households due to higher costs of servicing mortgage debt and a higher cost of living,” he noted.