ECB calls on banks to better identify bad loans

The ECB is urging banks to better identify the risks of bad loans. Due to the corona crisis, the quality of their loan portfolio has deteriorated, but this is not immediately visible due to government support measures. The central bank fears a increase in payment problems for businesses and households, the longer the corona crisis lasts.

Due to the poor economic situation, banks are making less effort to reduce the amount of bad loans on their balance sheets. According to the central bank, there are also weaknesses in the loan portfolio that are not yet fully visible. Andrea Enria, head of the supervisory department at the central bank, had this to say about that.

"We are now in the process of gaining a better understanding of banks' exposure to different sectors. The central bank is trying to get a better grip on the development of the quality of loan portfolios throughout the year and the impact that the pandemic is having on bank balance sheets."

Bad loans

Banks worldwide are struggling with an increase in the number of bad loans. The corona crisis has caused problems for many businesses and households. Due to government support measures, these effects are not always visible on banks' balance sheets, but as the crisis progresses, banks have to take into account an increase in the number of bad loans.

The ECB fears a sudden increase in the number of problematic loans, especially if governments start to phase out support measures. For that reason, central banks need to set aside more money to absorb losses. The ECB also asks for some moreabstention payments of bonuses and dividends.

According to the central bank, some banks in the eurozone have been slow to take stock of the risks of their loan portfolios. A quarter of banks are also said to be making insufficient use of digital technology to better identify bad loans.

This contribution comes from Geotrendlines