Banks too optimistic about expected credit losses
  • Monday, 26 April 2021

Banks too optimistic about expected credit losses

The European Central Bank (ECB) is of the opinion that European banks are too optimistic in their assessment of the level of credit risk following the COVID-19 pandemic. In their view, the level of provisions for potentially bad loans is too low, weakening the position of the banks. Credit impairments for US banks have been materially higher for the full year 2020 in comparison to European banks. Andrea Enria, Chair of the Supervisory Board of the ECB, expressed concerns surrounding the recognition of credit impairments in a speech. When the COVID-19 crisis hit, ECB Banking Supervision swiftly made capital buffers available to banks to enable them to absorb losses and to keep lending to the real economy. In combination with monetary and fiscal policy actions, the measures had the desired effects. Banks were enabled to accommodate the demand for credit coming from viable business and could look past the temporary stress in the liquidity position of their borrowers. Banks should also strive, however, to identify at an early stage any fundamental solvency problems and to proactively manage exposures towards distressed customers.

On 31 March 2021, the European Banking Authority (EBA) published the Risk Report for the last quarter of 2020. This report showed a decrease of the Non-Performing Loans (NPL) ratio. The share of stage 2 (increased credit risk) loans, however, reached a level of 9.1%, which is a 110 basis points increase quarter-over-quarter. Further, the share of loans under EBA eligible moratoria nearly halved. The share of stage 2 loans under moratoria (26.4%) is above that for loans under expired moratoria (20.1%) and nearly three times the ratio for total loans (9.1%). This might indicate that loans, which are still under moratoria, might be those with higher risks looking forward.

Please contact Martijn de Groot for more information.