ECB Warns Banks Have Yet to Fully Feel Pandemic’s Impact

Pedestrians wearing protective face masks pass the European Central Bank (ECB) headquarters in Frankfurt, Germany, on Wednesday, April 29, 2020. The ECB's response to the coronavirus has calmed markets while setting it on a path that could test its commitment to the mission to keep prices stable.

(Bloomberg) -- The full effect of the pandemic crisis on euro-area banks has yet to be felt as policy support so far has masked losses, several European Central Bank officials warned.

“The crisis is not over, and its economic impacts have still to fully emerge,” Irish governor Gabriel Makhlouf said on a panel Friday. “Euro-area banks are likely to face significant losses and further pressure on their already weak profitability prospects” and must be “extremely prudent” on issuing dividends and ensure their capital is able to absorb those losses, he added.

Makhlouf spoke alongside several of his Governing Council colleagues, including Lithuania’s Vitas Vasiliauskas, who warned of similar risks. The comments reflect greater unease over the outlook than expressed by ECB President Christine Lagarde this week, who said the year was starting on a more positive basis “than some would like to look at.”

“The main issue incoming is related to the wave of bankruptcies,” Vasiliauskas said, adding that in Lithuania, bankruptcies declined by 50% last year. “It means that we can expect some big increase this year. This risk is very important.”

A key challenge is that companies propped up by government support measures in 2020 could find themselves in vulnerable financial positions as those programs are withdrawn. That would pile pressure on the banking system, which has also been given capital and liquidity relief from regulators.

“Even though I remain overly optimistic about the medium prospects, I’m afraid that the scars from the pandemic will be more visible in 2021,” Greek governor Yannis Stournaras said. “The loan moratoria and the fiscal support measures averted the massive defaults of borrowers in 2020.”

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Cypriot governor Constantinos Herodotou added that the effects on the banking system may be felt well into next year, as “the results of the pandemic in terms of the impact on the loans and the credit risk will become visible in 2021.”

“Therefore what we need to do about it will take the latter half of 2021 and 2022,” he said.