ECB raises fears of new wave of bad loans

Europe's top banker sounds like the man who wasn't overly careful about what he wanted because now it's come true. Andrea Enria, who heads the European Central Bank's board of directors, rang an alarm bell in an interview published Monday, warning his institution's banks not to release credible credit loss estimates when they release their quarterly updates over the next few weeks. He also insisted that the ECB will be forced to extend its deeply unpopular ban on dividend payments and share buybacks beyond the end of the year unless he is convinced that banks are realistic about their loan books. This factor has weighed heavily on the stock prices of banks like Italy's Unicredit (MI: CRDI), which had been preparing generous payouts before the pandemic broke out. The ban was one reason why the Stoxx 600 Banks was one of the worst performing sub-indices on the market this year and has lost 39% since the beginning of the year. It rose 0.4% on Monday, in line with the broader market. In extreme cases, Enria told German Handelsblatt, the banks in the euro zone could face up to 1.4 trillion euros (1.7 trillion dollars) in non-performing loans resulting from the pandemic. It was "too early to rule out such a scenario," he added. Enria's message underscores a policy shift that has gradually taken shape over the summer. The regulators' first instinct was to avoid a credit crunch that would unnecessarily worsen the economic damage. As a result, they relaxed banks' capital adequacy standards and softened guidelines for rating bad loans. Eurozone banks responded with a wave of general write-offs on things like goodwill over the summer, but posted relatively few specific loan loss provisions. Given that this is the eurozone, where the last bad credit crisis was barely resolved, it was not a state of affairs that could last for long. Enria's changed message is thus a signal to banks that it is okay to pull the plug, especially for companies for whom the pandemic is accelerating an end that was already likely. "Banks should take an honest look at their loan books and see which of their customers will survive the crisis," said Enria. Indeed, he stressed, they should start building provisions now "so that the wave of bad loans doesn't get too big". Interestingly, Enria declined an open invitation to press for the creation of what he preferred to call a "bad bank" or "asset management company" of the Eurozone to meet the coming wave of bad credit. "A network of national asset management companies can work well," he suggested. Enria has been a strong advocate of a regional institute in the past, but has met stubborn opposition from a number of countries across the continent.