European Banks Are Taking Lending Risks Like It's 2007, ECB Says

(Bloomberg) -- European lenders are breaking promises that they would avoid excessive risk in the wake of the financial crisis, according to the European Central Bank.

“We’re seeing more and more banks take risks that, back in 2008 and 2009, they said they’d never do again,” said Korbinian Ibel, a director general at the ECB’s banking supervision arm. “They argue that everyone else is doing it, so how can they avoid it? That sounds a lot like 2007.”

Banks fueled the global financial crisis in the last decade after lending to companies and individuals who couldn’t afford to pay back their debts. Now European banks are struggling to increase profitability in the face of record-low interest rates, stricter regulation and a slew of bad loans left over from the last economic downturn.

Banks argue that pressure to increase revenue has pushed them into riskier business and encouraged them to loosen their loan-underwriting standards, Ibel said at a conference in Frankfurt on Monday.

“No one really wins in the end; the banks just fill their books with loans that could turn non-performing,” he said.

Ibel also said:

  • It’s up to banks which business model they pursue and “it is absolutely OK for us if they invest in high risk”
  • Still, banks need to make sure that their margins are high enough to cover potential losses
  • The ECB will build on its work studying credit risk and assess which banks have softened their underwriting standards the most

Read this for more on the ECB’s scrutiny of lending practices

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