European Central Bank has warned the Euro-area banks that they will have to set aside more money to cover losses when government pandemic support ends, according to Bloomberg. ECB also highlighted “stretched” valuations on particular asset prices that could drop suddenly, heightening risks in the financial system. 

  • ECB is concerned that once emergency support is pulled, companies won’t be able to cover repayments, putting banks under renewed stress
  • The ECB has availed fiscal aid by keeping interest rates low and providing monetary stimulus and plans to step up its actions again in December.
  • The Central bank has also given banks regulatory relief and halted dividend payouts through the end of this year.
  • ECB will publish new projections, including whether it will halt suspension of dividends, on December 10
  • Provisions for losses have increased, but there is optimism since guarantees and moratoria have lengthened the time it takes for weak economic performance to translate to loan losses. 
  • Provisions to companies in the euro area are lower than the previous crises and below those of the U.S due to measures taken by European governments and the central bank to reduce default risks and, partly, the weak profitability of banks.
  • ECB has reiterated that pandemic support should remain, but governments should be keen to avoid giving rise to debt sustainability concerns in the medium term
  • EU should reduce reliance on critical clearinghouses in the U.K. as the latter prepares to exit the EU single market on December 31-ECB

European stocks are declining. DAX is down 0.25%, CAC 40 is down 0.15%