European Banks Still Facing Challenges

There’s been a noticeable difference between the pandemic and the global financial crisis of 2008: European banks have a much stronger capital position now than they did before. This is in part thanks to much tougher requirements imposed by regulators in the wake of the 2008 shock — and it looks to be paying off. European banks are so confident about their capital positions that some are even ready to resume dividend payouts this year, despite regulators asking for caution. Most important takeaway is that we have not seen a deterioration in asset quality yet since the onset of the crisis. Most important takeaway is that we have not seen a deterioration in asset quality yet since the onset of the crisis. Major lenders in Europe have benefited from stimulus measures introduced by governments, but also from policies from the European Central Bank and Bank of England. Their steps have contained the number of business failures and have boosted lending. But the situation could change over the next year as these fiscal and monetary interventions are potentially scaled back. Bad loans will start to appear over the next year or so. That’s when we will get a clearer picture of how bad the situation is in the corporate sector. Governments haven’t announced that they are lifting financial support, but as the health crisis slows down and economies reopen, they will likely pull back on their contributions. That will put pressure on certain firms, which might end up missing their debt repayments and file for insolvency. Interest rates were cut to record low levels in the wake of the pandemic, but central banks could consider raising them back up if prices rise significantly in the near future. This is a smaller risk in the euro zone where recent increases in inflation were associated with one-off events, such as new consumer tax rules in Germany. There is one bright spot that could help European banks in the recovery phase. Economists believe that consumers will return to the shops and restaurants, and start to make the economy move again the moment that social restrictions are eased.