While the COVID-19 pandemic has given the world economy and unprecedented shock, Europe’s banks have weathered the initial impact relatively well, according to a report by the sector watchdog the European Banking Authority (EBA).
“Compared with the previous crisis, bank lending to the real economy has increased,” the report – Risk assessment of the European banking system – says. In the first stage of the pandemic, this demand came primarily from small and medium-sized enterprises looking to make use of the loans on offer to secure liquidity and continue operating. Later, credit demand was driven by government guaranteed loans. These factors have led to a seven per cent increase in total assets for banks.
The EBA said it as concerned about both the future profitability of the sector and the quality of those assets as Europe comes into 2021: “It still needs to be seen how the phasing out of COV- ID-19-related measures, such as moratoria on loan repayments and public guarantees, will affect asset quality, but it is very likely it will deteriorate further,” the report says.
Going into the new year, banks have significant exposures that are vulnerable to climate risk, the report says. “According to a preliminary analysis of recently collected data, more than 50 per cent of exposures to large corporates are to sectors potentially subject to transition risk. In particular, the largest share of climate-relevant exposures com- prises exposures to manufacturing, electricity, construction, transport and real estate sectors.”
The ECB has been piloting a scheme to see how far banks are ready to transition to a net-zero economy. It said that the European Commission’s project to create a harmonised classification on environmentally sustainable activities is a first step to achieving meaningful reporting and risk management. So far, though such initiatives have been too sector specific.
“The limitation of such a classification method is that it does not capture the different activities that an obligor might be involved in,” the report said, “since it only classifies each obligor by its main activity.” In other words, the sectoral approach may only capture part of the overall picture for each organisation. EBA plans to publish its work in classification in 2021.
Most banks had made satisfactory preparations for the UK leaving the European Union at the end of 2020, it said. Some institutions that are relocating to the EU had not fully finalised their moves – including putting in place adequate risk management.
“In particular, they should ensure that adequate management and risk management capabilities are in place in the EU and that their EU customers’ exposures have been transferred into entities domiciled in the EU,” the EBA said.
Read the report here: Risk assessment of the European banking system.