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Law360, London (December 14, 2020, 4:30 PM GMT ) Europe's top banking watchdog has warned that the bloc's banks could face a rise in defaulting loans as the COVID-19 pandemic lingers, as repayment holidays end and economies continue to suffer.
The European Banking Authority said Friday that it found in its annual risk assessment of the bloc's banking system that risk is already building up in the banking system as loans deteriorate in quality.
The watchdog said that the COVID-19 crisis means there has been a rise in loans whose credit risk has "increased significantly" since the debt was taken out and that the number of loans in default has risen too.
"Despite the COVID-19 shock, banks have maintained solid capital and liquidity ratios and have increased their lending to the real economy," the EBA said. "However, economic uncertainty persists, profitability is at record low levels and there are several early signs for a deterioration in asset quality."
The regulator said the number of risky loans is likely to rise as government programs designed to help consumers weather the COVID-19 storm are phased out, particularly as freezes on interest payments and loan repayment holidays come to an end.
The watchdog also said that banks should be aware that risks associated with climate change are also affecting the stability of loans.
"More than 50% of exposures to large corporates are to sectors potentially vulnerable to climate risk," the EBA said, as it warned that the number of risky loans is likely to increase over the next six months.
The European Central Bank warned this month that the level of debt in Europe run up by borrowers who cannot repay loans during the COVID-19 pandemic could reach up to €1.4 trillion ($1.7 trillion) in a severe scenario, similar to the coronavirus crisis.
The ECB urged lenders to continue reporting to regulators on the quality of their assets despite a relaxation in rules on bad loans. A bank loan is categorized as non-performing when a borrower fails to pay installments or interest after more than 90 days.
Regulators have encouraged banks and lenders to offer repayment breaks throughout 2020 to help with the financial crunch brought on by the pandemic.
The European Banking Authority said in November that lenders had granted repayment freezes on loans totaling €870 billion by the end of June. Approximately half of the loans that have been paused or frozen were due to expire before September this year, the regulator said. Another 85% were due to expire before December.
The EBA has encouraged lenders to collect information on the losses they have racked up from granting borrowers repayment breaks during the coronavirus crisis, even if the fall in profits does not mean they have to hold greater reserves of capital.
--Additional reporting by Najiyya Budaly. Editing by Ed Harris.
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