An EU banking regulator said on Monday a preliminary assessment of the coronavirus’ impact shows that overall, lenders should successfully withstand an expected jump in bad loans.
In the wake of the global financial crisis in 2008-2009, regulators required increases in the amount of capital banks hold to survive severe economic downturns.
The European Banking Authority (EBA) said the region’s banks “entered the health crisis with strong capital and liquidity buffers” and that “this capital buffer should allow banks to withstand the potential credit risk losses…”
The EBA, which carries out annual “stress tests” to see how banks would fare during different types of crisis, said its assessment was based on last year’s exercise.
It said that between the funds amassed during previous years and regulatory changes adopted during the crisis, the capital buffers of European banks was on average around five percentage points above the required level.
Lockdowns imposed by governments to slow the spread of the coronavirus severely disrupted many businesses, and despite government help there is concern that many will eventually fail.
The EBA estimates that a surge in loans on which borrowers default or fall behind in payments – forcing banks to dip into their capital to absorb the loss – similar to one European lenders suffered during the sovereign debt crisis, will still leave them with a buffer of 1.1% above the required minimum.
A study released at the beginning of April by credit insurance firm Coface forecast that bankruptcies could surge by 25% this year.
But the EBA noted that “the extent to which banks will be affected by the crisis is expected to differ widely, depending on how the crisis evolves, the starting capital level of each bank and the magnitude of their exposures to the most affected sectors.”
Regulators have moved quickly to ease restrictions on banks and give them added flexibility during the crisis, while central banks have flooded them with liquidity to ensure they don’t fall victim to a cash crunch.