Provisions for losses on loans to companies are lower than in previous crises and below those seen in the U.S. European governments and the central bank have reduced default risks, and partly because of weak profitability at banks. Euro-area financial stocks declined on Wednesday, with the Euro Stoxx Banks Index dropping 1.5% as of 10:40 am. Frankfurt time, underperforming the broader market. The ECB also highlighted “stretched” valuations in some asset prices that raises the risk of a sudden drop hitting the financial system. That echoes warnings by the Federal Reserve and the International Monetary Fund this month of the risk to markets if the economic impact of the coronavirus worsens. ECB has enabled that fiscal aid by keeping interest rates low with exceptional monetary stimulus, and plans to step up its actions again in December. It has also given banks regulatory relief, in return telling them to halt dividend payouts at least through the end of this year.
Vaccines closer to rollout and an end to the pandemic in sight, the ECB says public authorities face a delicate balance. They’ll shock the economy if they end pandemic support too suddenly, but undermine a necessary restructuring if they keep measures in place too long. Government support schemes are essential currently but should remain targeted towards pandemic-related economic support and avoid giving rise to debt sustainability concerns in the medium term. Another immediate risk, the U.K.’s departure from the European Union’s single market on Dec. 31, is “mostly contained” after the European Commission allowed temporary access to critical derivatives clearinghouses in the U.K. Longer-term, it said problems stemming from climate change shouldn’t be forgotten. Bank lending to carbon-intensive sectors — a signal of exposure to such risks — shows few signs of declining.