ECB Sees Economic Spillover Risks for Banks From Russia Turmoil
ECB Sees Economic Spillover Risks for Banks From Russia Turmoil
(Bloomberg) -- European banks have so far navigated the turmoil resulting from Russia’s invasion of Ukraine but need to be prepared for knock-on effects in seemingly unrelated parts of their business, their top regulator said.
Direct exposures to Russia are “manageable overall” and even scenarios where banks would walk away from their Russian units appear contained given their capital strength, Andrea Enria, who leads the European Central Bank’s Supervisory Board, said Tuesday.
“The area which we know least is the one of the indirect effects, which could be surprising,” Enria said at a conference organized by Morgan Stanley. “We need to be very watchful there.”
Many European banks have dialed back their exposure to Russia in recent years, yet the war has sent ripples through commodity markets and disrupted supply chains for manufacturing companies. European bank stocks led the rebound from the pandemic last year only to become some of the worst-performers on the stock market in a stunning reversal that put into question whether the industry will finally emerge from its lost decade.
In a presentation, Enria highlighted the several channels of indirect impact from the invasion of Ukraine for banks:
- Concentrated exposures to non-Russian counterparts hit by sanctions
- Links with financial institutions that aren’t banks
- A possible Russian sovereign default scenario
- Commodity price fluctuations and broader financial market volatility
- Cyber risk
The price of nickel, in particular, has seen wild swings recently, triggering billions of dollars in losses for traders who bet the wrong way and leading the London Metal Exchange to suspend trading for the first time in three decades.
Enria said the ECB was monitoring the issue but doesn’t plan to take action because the matter “is below the systemic risk type of red lights flashing” for banks.
The ECB is engaging with banks most at risk from the war in Ukraine about their plans to set aside provisions for doubtful loans, Enria said. Bloomberg reported last week that the ECB is concerned that lenders’ balance sheets could suffer a series of hits after the war plunged the global economy and markets into turmoil.
At the same time, Enria said that catch-up payouts banks are making via dividends and buybacks are “broadly acceptable” given restrictions that were put in place at the height of the pandemic. While there’s still flexibility to extend a part of the regulatory relief the ECB afforded beyond this year, he doesn’t currently see a need to do so because banks generally didn’t dip into their capital buffers.
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