Os Eurozone banks are operating in a “challenging environment” due to geopolitical and trade tensionsthe European Central Bank (ECB) warned this Monday, pointing out that, in a more adverse scenario, non-performing credit would rise to 2014 levels.
“European banks operate in a challenging environment. Maintaining its resilience and ability to support the real economy requires a solid institutional framework and forward-looking risk assessments.”said the chair of the ECB Supervisory Board, Claudia Buch.
Speaking at a hearing at the European Parliament’s Economic and Monetary Affairs committee in Brussels, the official reported on recent stress tests in the euro banking system and pointed out that, In the face of an adverse macroeconomic shock, European banks would have “a better capacity to absorb these losses compared to the previous stress test of 2023”.
Based on the assumption that geopolitical and commercial tensions would worsen with higher tariffs – which would lead to greater uncertainty, lower market confidence and lower growth – Claudia Buch however pointed out that, In this more adverse scenario, the non-performing credit ratio “would increase to 5.8%, reaching levels last observed in 2014”.
“Currently, non-performing loans stand at around 2%. Aggregate losses would amount to 628 billion euros, which represents 80 billion euros more, or 14% than in the previous stress test”he exemplified. And he appealed: “We are vigilant and hope that banks have the same prudence”.
The main reasons for current geopolitical and commercial tensions are the rivalry between great powers – the United States and China –, armed conflicts in Ukraine and the Middle East, the dispute for strategic resources and critical technologies and the fragmentation of global value chains.
The EU is currently reforming its crisis management and deposit guarantee framework to strengthen depositor protection and reduce the need for bailouts with countries’ money..
Claudia Buch argued that “resolution instruments for a wider range of banks and the guarantee of sufficient financing for banks in the resolution process will reinforce financial stability, protect depositors and reduce dependence on public funds”. “Generally speaking, a more credible crisis management framework makes potential crises less likely and less costly,” he pointed out.
Claudia Buch defended that it is time for the EU to “better prepare for future crises”. “Current challenges require more Europe, not less: the harmonization of national rules would significantly improve integration, strengthen competition and increase efficiency”, he listed, noting that “the weakening of standards […] it would put confidence in European banks at risk and reduce their ability to respond to challenges”.
O stress test mentioned in the hearing covered 96 euro area banks (51 large and 45 medium-sized) under direct supervision by the ECB.
It revealed strong profitability, which provides banks with a solid reserve against the losses studied there, despite admitting possible impacts due to “high geopolitical tensions”.