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Law360, London (December 7, 2020, 1:05 PM GMT) -- 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), Europe's central bank has warned.
The European Central Bank urged lenders to continue reporting to regulators on the quality of their assets despite a relaxation in rules on bad loans.
The ECB said on Friday that it estimates that so-called non-performing loans could reach up to €1.4 trillion in a severe scenario, similar to the coronavirus crisis. A bank loan is categorized as non-performing when a borrower fails to pay installments or interest after more than 90 days.
But Andrea Enria, chairman of the ECB, told the European Parliament on Friday that banks have so far "not experienced any material increase in non-performing loans." He added that larger financial institutions have seen a drop in their ratios of non-performing loans, known as NPLs, which stood at 2.94% in June compared with 3.22% in December 2019.
European Union governments introduced payment holidays throughout 2020 for consumers and businesses struggling to keep up with loans. But those freezes could lead to a growing number of bad loans if customers are still unable to repay money owed when the concessions end.
Enria told members of the Parliament on Friday that banks must continue to report to regulators on the quality of their assets to help safeguard against a rise in loan defaults, which could lead to non-performing loans. This is important even though the ECB has been lenient on banks that hold high levels of non-performing loans during the pandemic, he said.
"Banks with high levels of NPLs have been allowed to postpone the submission of their plans to improve their asset quality," Enria told members of the EU Parliament.
"At the same time...it remains crucial to continue identifying and reporting asset quality deterioration and the build-up of NPLs in accordance with the existing rules. This is particularly necessary to encourage banks to engage with distressed debtors at an early stage and to provide them with appropriate solutions."
He also warned that the exact amount of bad loans from the pandemic is difficult to forecast because of "the current uncertainties in the macroeconomic outlook and the persistently high COVID-19 caseload in the euro area."
"The ECB is therefore monitoring the development of NPL ratios very closely," Enria added.
The EU has struggled since 2015 with a debt mountain that grew as high as €1.15 trillion. The European Central Bank's latest figures show that this reduced to €636 billion by June 2019.
--Editing by Ed Harris.
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