EU warning against loan moratoriums

The extended moratorium on loan repayments granted to businesses and households as part of pandemic offsetting measures create increased risks for the quality of banks’ portfolios, the European Commission warned in its Enhanced Surveillance Report yesterday.

The high figure of frozen loans – reaching up to 20.8 billion euros based on end-September 2020 data – and the poor history of banks in sustainable restructuring of loans, will force them to take increased provisions, a prospect that will undermine their already fragile profits, the report noted.

On the other hand, the Commission highlighted the significant role servicers have played in the reduction of nonperforming exposures’ stock, with the loans under their management rising 40% in 2020 from the year before.

Brussels also highlighted the positive impact of the state subsidy program (“Gefyra”) for mortgage loan tranches in reducing the credit risk, and stressed the need for a careful design of a similar program for the subsidy of business loans (known in Greece as “Gefyra 2”) that would also reduce the moral risk. The Commission further warns about the possible effects of the property auction freeze.