Loans – European Banks Warned By ECB to Keep away from Letting Dangerous Loans Pile Up

Photographer: Angel Garcia/Bloomberg

The European Central Bank urged the area’s huge banks to do a greater job scrutinizing corporations’ capacity to repay loans and climate the pandemic, warning them of the chance {that a} mountain of loans ultimately sours, weighs down the banking business and slows the financial restoration.

In a letter to banks’ chief executives, the ECB’s supervisory arm mentioned it’s more and more essential for banks to evaluate these dangers now as a substitute of ready till it’s too late when problematic loans construct up on stability sheets.

Lenders have been buoyed by unprecedented quantities of assist from authorities over the pandemic. They’ve additionally benefited from regulatory flexibility on delaying provisions for uncertain loans.

How some banks have been accounting for these loans has various.

“We have been observing differences in credit risk management approaches,” Elizabeth McCaul, ECB supervisory board member, mentioned in an accompanying weblog submit. Areas of concern included overly optimistic assumptions and a few “worrying cases” the place banks have relaxed their risk-modeling requirements.

“If we delay – or worse, fail to act – we will have to pay the price of today’s inaction tomorrow,” she wrote. “We would be wise to start preparing now so that we may enjoy the strongest possible conditions when those healthier days arrive.”

Learn extra: BOE warns of flaws in banks’ capacity to estimate loan losses

— With help by Nicholas Consolation