Frankfurt (awp/afp) – The European Central Bank (ECB) is concerned regarding the repercussions of the war in Ukraine and the rise in interest rates for the financing of banks, it indicated on Monday during the presentation of its priorities for the supervision of the sector.
While banks have so far shown themselves to be ‘resilient’ in the face of the fallout from the war in Ukraine, the ECB is concerned ‘regarding the implications of the macroeconomic environment and financial market dynamics for asset quality and funding banking,” write Kerstin af Jochnick, a member of the ECB’s supervisory board, and Mario Quagliariello, a director at the banking supervisor, in a blog post.
The 115 or so large banks directly supervised by the ECB in the euro zone still display satisfactory net stable funding ratios and liquidity ratios. But “the supervisors must look under the surface” at the moment when, due to inflation records, a long cycle of particularly accommodating monetary policy is coming to an end.
For years, the ECB has lent generously to banks at very low cost, even remunerating them if they in return lend enough to the economy. These so-called “TLTRO” loans will have to be repaid no later than the end of 2024 and the ECB even tightened their conditions in October to encourage early repayments.
Deprived of this windfall, “banks might face funding problems”, especially as “investors’ appetite for risk has diminished”, point out the authors of the blog. For banks, profitability and the ability to maintain acceptable funding ratios might suffer.
One of the supervisor’s priorities in the coming months will therefore be to “examine banks’ exit strategies from TLTRO funding, as well as their liquidity and funding planning more broadly”. The ECB also wants to closely control credit risk management, while the number of defaults is expected to increase once morest a backdrop of the energy crisis and economic slowdown.
afp/vj
