Banks in Europe Face Potential $1.7 Trillion Covid-19 Cliff

Banks in Europe Face Potential $1.7 Trillion Covid-19 CliffBanknewsnow

European banks say they are doing just fine during the coronavirus pandemic. But regulators and bank executives are concerned about the elephant in the room: a wave of bad loans that could overwhelm lenders when government rescue packages end. The economies of Europe plunged this year, and fresh lockdowns in many countries are weighing on

European banks say they are doing just fine during the coronavirus pandemic. But regulators and bank executives are concerned about the elephant in the room: a wave of bad loans that could overwhelm lenders when government rescue packages end.

The economies of Europe plunged this year, and fresh lockdowns in many countries are weighing on nascent recoveries. Yet the unprecedented levels of government and financial-sector support, including repayment moratoriums sometimes covering a quarter of all outstanding loans, have kept households and companies afloat. That means banks haven’t had to recognize those loans as potentially soured.

Even bank CEOs are wondering what happens when the support ends.

“What we have is a very strange crisis” in which economies are falling sharply but defaults aren’t rising mostly because of the relief measures, Steven van Rijswijk, chief executive of ING Groep, said last week. “When these measures stop, what then will the picture be? We have limited visibility as of yet.”

Regulators fear some European banks are too slow to react to borrowers’ potential troubles ahead. The European Central Bank said bad loans in the eurozone could soar as high as €1.4 trillion, equivalent to $1.7 trillion, if the economies fall even more than expected, a scenario the central bank said is severe but plausible. That amount would be more than during the aftermath of the financial crisis.

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