Banks Win Another Reprieve From EU Officials on Virus Fallout

(Bloomberg) --

Europe is pulling out all the stops to protect its troubled banks from a second wave coronavirus hit that would deepen what’s already the deepest recession in memory.

Adding to a slew of concessions to the financial industry, European Union lawmakers moved this week to help lenders avoid a blow from potential losses on government bonds.

The measure stands to bolster banks in Italy and Spain, which have worried authorities for years because of their massive sovereign debt holdings. European Central Bank officials warned last month against the kind of vicious circle that turbocharged last decade’s euro area financial crisis: rising bond yields undermining banks’ finances, further hitting bonds, and so on.

A “severe resurgence” of the virus and a return to lockdown “would lead to a much deeper fall in GDP and a much slower recovery path,” Andrea Enria, chair of the ECB supervisory board, said in a speech Friday at virtual meeting organized by UniCredit SpA.

The ECB, which sees the euro zone economy shrinking as much as 12.6% in a “severe scenario,” will start a new stress test of banks’ vulnerability to a a multiyear slump, Enria said.

To be sure, the central bank’s commitment to scoop up sovereign debt has kept a lid on yields and prevented borrowing costs from surging.

Banks’ Role

The legislation set to be approved by European Parliament in coming days is the latest sign that authorities are counting on the industry to keep money flowing while job losses surge, demand plunges and fears rise that the virus could return later this year.

European banks could face a capital hit of about 320 billion euros ($363 billion) from the coronavirus crisis, according to the European Banking Authority, the Paris-based body that sets banking standards. The Bank of England sees British institutions facing 80 billion pounds ($101 billion) of losses on loans to companies, consumers credit and residential mortgages.

The top EU official in charge of handling failing banks, Elke Koenig, said in an interview this week it’s “broadly realistic” to expect some to struggle before the year is out.

“Will this be institutions that you will have to declare failing or likely to fail?,” said Koenig, chair of the Brussels-based Single Resolution Board. “I don’t know. We are now just monitoring it.”

Bond Measure

The sovereign bond measure would free banks from taking a hit to their capital ratios should they face losses on portfolios of government debt. It was added to legislation softening regulations put in place after the last financial crisis. The package eases restrictions on leverage, gives lenders more flexibility to handle loans to troubled borrowers and allows the industry to save on capital when they spend on software technology and lend to small businesses.

Highlighting banks’ bind, lenders in Italy have gone to buying from selling government debt as the recession took hold. Banks there added another 46 billlion euros of sovereign bonds, bringing their total now to about 360 billion euros, still less than 10% of total assets, according to Bank of Italy Senior Deputy Governor Daniele Franco.

“There is certainly a need for some balancing between Italian Treasury issuance needs and banks’ prudent investments on the other, but I believe it remains manageable,” Franco said Friday at a virtual conference sponsored by Goldman Sachs Group Inc.

As of March, 6% of Spanish banks’ assets were in its government’s debt, according to data from the the Bank of Spain and the Treasury.

Capital Relief

Even before this legislation, banks’ trading desks in London, Paris and Frankfurt received relief on capital hits they might have taken starting in the first half of the year following a surge in volatility on stocks, bonds and commodities. When markets swing more wildly than banks’ internal estimates, capital rules can require them to have more funds on hand as a way to ensure they have enough money to absorb any coming losses.

ECB authorities and supervisors in Britain have also allowed banks to dip into capital levels built up in better times in order to cope with increased demand for credit and to swallow losses on loans borrowers can’t repay.

While banking regulators intend the relief to be temporary, they’ve yet to put an end date on their response to the crisis.

©2020 Bloomberg L.P.