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Law360, London (May 26, 2020, 12:38 PM BST) -- Banks hold sufficient reserves against credit losses caused by the coronavirus pandemic, Europe's banking watchdog said, despite predicting that the sector will have to absorb a growing pile of bad debt from borrowers who cannot repay loans.
The European Banking Authority said Monday that the bloc's lenders hold enough strong capital and have sufficient liquidity to withstand potential losses from the crisis caused by COVID-19.
The EBA said in a preliminary assessment of the impact of the virus on the sector that banks had a common equity tier 1 ratio — a measure of core equity relative to risk-weighted assets that is intended to signify a lender's financial strength — of 15% at the end of 2019. They held 9% in 2009.
European banks also had, on average, a liquidity coverage ratio of close to 150%, the regulator said. The ratio — which banks must meet or exceed to ensure they hold enough capital to withstand a 30-day stress period — is significantly above the regulatory minimum requirement of 100%.
"Banks have entered the COVID-19 crisis more capitalized and with better liquidity compared to previous crises," the EU authority said Monday. "In contrast to the global financial crisis in 2008-2009, banks now hold larger capital and liquidity buffers."
But the EBA warned that it expects banks to face a growing number of non-performing loans, which could reach levels similar to those recorded after the 2008 financial crisis. A bank loan is categorized as non-performing when a borrower fails to pay installments or interest after more than 90 days.
The EU has struggled since 2015 with a debt mountain that grew as high as €1.15 trillion ($1.24 trillion).
But payment holidays introduced by some EU governments for consumers and businesses struggling to keep up with loans could help to soften the impact of defaults during the pandemic, the authority said.
"Nonetheless, banks should assure that proper risk assessment continues to be performed," the EBA said. "The extent to which banks will be affected by the crisis is expected to differ widely, depending on how the crisis evolves, the starting capital level of each bank and the magnitude of their exposures to the most affected sectors."
The EBA said in March that it will delay its biennial stress tests for banks until 2021 to allow lenders to focus on operations and support customers during the pandemic.
The latest test results, which look at whether lenders have the required capital buffers to survive severe shocks to the financial system, were due to be published in July.
The tests help expose which banks are weaker and more sensitive to shocks and rank them based on the level of risk they are taking. The last test, completed in 2018, showed that Europe's biggest banks could weather a severe economic downturn.
--Editing by Ed Harris.
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