Banks

Full impact of pandemic on Europe’s banks won’t be clear until 2021, official says

Key Points
  • The fallout from the coronavirus pandemic on Europe's financial institutions will become more apparent in the coming months, according to a senior European banking official, and there could be one or two casualties in the sector.
  • Elke König, chair of the Single Resolution Board of the Single Resolution Mechanism, which oversees the restructuring of failing banks in the EU, said she expected a rise in the number of non-performing loans (NPLs) in the region, which in turn would hit bank balance sheets.
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Impact of pandemic on Europe's banks won't be clear until 2021, SRB head says

The fallout from the coronavirus pandemic on Europe's financial institutions will become more apparent in the coming months, according to a senior European banking official, and there could be one or two casualties in the sector.

Elke König, chair of the Single Resolution Board of the Single Resolution Mechanism, which oversees the restructuring of failing banks in the EU, said she expected a rise in the number of non-performing loans (NPLs) in the region, which in turn would hit bank balance sheets.

When these loans could peak, however, was the "$60,000 dollar question," König said.

"I would have thought in the beginning (of the pandemic) in spring that we might see the first real impact on balance sheets in the third or fourth quarter of this year," she told CNBC's Annette Weisbach on Monday.

However, König highlighted that some government support implemented at the start of the coronavirus crisis was starting to expire, and as such, further damage to Europe's banking sector could become apparent later in 2021.

"Until the dust has settled a bit I would expect we will see it (a rise in NPLs) in the third and second quarters of next year ... Let's be clear, this is a unique situation," she said.

She stressed that it was not all a "doom scenario," however, adding: "We will see NPLs but we will also see other industries doing great."

"We have clearly stated that banks should stay ready, should be reasonable and have their risk management up to date. As soon as they address an emerging problem, the better," König said.

The purpose of the Single Resolution Mechanism is to ensure the orderly resolution (or winding-down) of failing banks in the region.

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The SRM came into being in 2014 after the 2008/2009 financial crisis and subsequent euro zone sovereign debt crisis. A key element in the SRM is the Single Resolution Fund, financed by contributions from the banking sector, to help wind down failing banks, and to shore up the whole financial system.

The SRM is seen as a key pillar of the euro zone's banking union (although other EU countries can join), alongside the Single Supervisory Mechanism. The latter gives the European Central Bank supervisory powers over the region's banking institutions to check they comply with European banking rules, meet capital requirements and are not vulnerable to collapse.

Asked whether she expected to see some bank failures given the end of support measures, König said she was "mildly optimistic that we will not see a wave of bank failures."

"Why am I mildly optimistic? The ECB did their (vulnerability) analysis, others did similar stress tests, they show that after the financial crisis, banks' balance sheets have been cleaned up and beefed up (and) have more and better capital, so on average we can weather this kind of storm," she said

Nonetheless, she added that "you can never rule out the one or the other failure. Banks that have been fairly weak going in may not come out stronger."

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