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Global Economy

Europe's banks are defying the crisis

At the beginning of the corona pandemic in 2020, the bank supervisors at the European Central Bank were nervous. There were lockdowns, the economy collapsed. Europe's banks should not be sucked into this maelstrom. Therefore, the guards took several measures. For example, they recommended that the financial institutions forego distributions and keep their money together. With success.

"European banks have, by and large, weathered the pandemic well," said Frank Elderson, deputy head of ECB Banking Supervision, at the annual press conference. The ECB oversees 115 financial institutions across the eurozone. These include Deutsche Bank, Commerzbank, Dekabank and DZ Bank. And the European institutes have generally proven to be crisis-resistant, according to Elderson.

So far, very few loans have failed

According to the banking supervisory authority, there are six problem children. However, the pandemic did not affect them, but their problems were homemade. The banks now have to consider concrete measures to improve their financial situation. The supervisors do not disclose which institutes are involved and what they are supposed to do specifically.

Remarkable: In the crisis year 2021, European financial institutions lent a lot of money to companies and private individuals. Contrary to all fears, only two percent of all loans are bad or at risk of default. These are loans worth 400 billion euros. That may sound dramatic. But in fact the banks are sitting on fewer non-performing loans than before the Corona pandemic, and so that doesn't seem to be a big problem at first.

Institutes need a thicker financial cushion

However, the Vice President of ECB Banking Supervision does not want to give the all-clear. Elderson points to the government aid that many companies and individuals receive. However, it is not clear whether they will be able to repay their loans without this support. And what if the aid is reduced? The bad end could still come.

"It is imperative that banks prepare for the future," said Elderson. Above all, the banks should keep a better eye on their credit risks. As a precaution, the supervisors are demanding thicker financial cushions from the financial institutions. If the last year put aside a total of 14.9 percent in equity, it should be 15.1 percent this year.

If financial institutions permanently violate these regulations, the supervisors can crack down. For example, they can impose fines or, in the worst case, even revoke the license of the banks. So far, however, such sanctions have only rarely been imposed.

German banks are proving to be crisis-resistant

Germany's top banking supervisor, Joachim Wuermeling from the Bundesbank, is also satisfied: "The local banks are doing well when it comes to the European temperature measurement," he says. They would leave the crisis period in good shape overall. And from his point of view, that also has something to do with the fact that they generally granted loans very prudently and prudently during the crisis.

However, Wuermeling, who is responsible for banking supervision on the Bundesbank board, sees another problem, namely high inflation. In the entire euro zone as well as in Germany, it was recently around five percent. "This leads to increased costs, some of them significantly, for both consumers and companies," he warns. And that, too, could ultimately lead to them owing money to the banks and loans could eventually collapse.

Tied to long-term loans

Even if interest rates rise, it would initially be difficult for the banks. Because then they have to pay their customers interest on the savings so that they don't switch to the competition. The banks themselves would initially benefit from the higher interest rates because they have issued many long-term loans at low interest rates, to which they are bound in the coming years. "That can become a problem in the short term, but it will grow out over time," says Bundesbank board member Wuermeling.

And as if that weren't enough challenges, the banking industry must also pay more attention to the risks of climate change. The European Central Bank is conducting its first climate stress test this year. She plans to publish the results in July.

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