ECB urges banks to clean up before the next crisis
Eurozone banks had made progress since the financial crisis but had to do more to put their houses in order during economic good times, European Central Bank (ECB) watchdogs said on Wednesday.
“Certain banks must do more. In particular, they must clean up their balance sheets,” chief ECB supervisor Daniele Nouy said in Frankfurt.
Top of the watchdogs’ list is a €760bn mass of bad loans that was still weighing on banks’ balance sheets in the third quarter of 2017, a figure that had fallen by €200bn over two years.
Nonperforming loans, on which borrowers have failed to keep up with repayments, “drag down profits, they divert resources that could be put to more productive use and they keep banks from financing the real economy”, Nouy said.
“Banks should use the good times to reduce ... [nonperforming loans]. Once a downturn sets in, it will become much harder.”
For its part, the ECB will lay out more clearly how it expects banks to set aside cash to cover the risks of future bad loans in an update to its guidance.
With the banking sector more robust, plans to establish a eurozone-wide deposit insurance scheme could advance “a step further”, Nouy said.
The European Commission in Brussels is keen to push forward with the scheme, but governments and lenders in wealthier, more stable countries such as Germany fear they will end up on the hook for upsets in nations with higher debt levels.
ECB deputy banking supervision chief Sabine Lautenschlaeger warned that banks “must continue to prepare for any outcome, including a hard Brexit” if talks between London and Brussels on Britain’s departure from the EU failed to reach an agreement. Uncertainty looms large over whether London-based lenders will retain their privileged access to EU markets after Britain leaves.
Eight had already submitted applications for a eurozone banking licence, while four others would “significantly extend their activities in the euro area”, Lautenschlaeger said.
Any remaining banks must present their plans at the very latest by June, she said. “We won’t tolerate any empty shells,” Lautenschlaeger said, reiterating supervisors’ insistence that “banks need to establish sufficient local capabilities” if they move to the continent.