Severe recession caused by the coronavirus pandemic is set to lead to a deterioration in bank asset quality in the euro area, the Chair of the Supervisory Board of the European Central Bank Andrea Enria said Tuesday.
The impact will be more “prominent in sectors most affected by the pandemic and the subsequent lockdown measures” and could reflect differences in the strength and speed of the recovery across areas of business, Enria said at a hearing in the European Parliament.
As part of the ECB’s Covid-19 credit risk strategy, bank supervisors will closely investigate and monitor potential cliff-edge effects in asset quality that could occur once public support measures related to COVID-19 are withdrawn, Enria said.
The ECB has also asked banks to adequately prepare for the upcoming increase in nonperforming loans, or NPLs.
In an environment of low interest rates and rising credit losses, there is no one-size-fits all structural solution for banks, Enria said. The central banker urged banks to adjust their business models to ensure their sustainability in such conditions.
Enria also said that the ECB plans to ask all banks to provide it with their suitability assessments of board members before making appointments.
The ECB supervisory board will give greater consideration to any supervisory findings related to positions previously held by the candidates, as well the specific needs of the banks, the top official said.
The central bank will further clarify the way in which it reassess sitting board members, if new relevant facts emerge which could affect their suitability, Enria added.
The ECB official also said that a climate risk stress test will be carried out in 2022, which will allow a review of banks’ practices in this area and take concrete follow-up measures where needed.
The ECB will also set up a climate change center that will pool staff with data and climate expertise in workstreams that cover both the banking supervision and the monetary policy functions.
Ernria also urged banks to allocate enough staff and assets to institutions inside the banking union post-Brexit. This is necessary to ensure adequate management of risks both in and from Europe, the Italian economist said.