Challenges faced by EU Banks During the COVID-19 Crisis

The European banking sector has long been one of the weakest spots of European Union integration. As if the 2008-2009 crisis was not enough, the 2012 Eurozone sovereign debt crisis sent the sector on a “death spiral”.

Somehow, it survived. However in the aftermath of the sovereign debt crisis, the European banking sector continued to deliver poor performances. Deutsche Bank, for instance, one of the sectors flagship banks, has been in the news recently as it struggled with high debt levels,and had to lay off employees, with its stock market performance looking more bearish by the day.

Coronavirus and European Banks

The pandemic caught the European banking sector relatively strong when compared with the previous crisis – ample liquidity and strong capital levels offer a buffer in times like these.

For instance, in 2019, the Core Tier 1 ratio moved to 14% for the first twenty largest institutions in the sector. Moreover, the liquidity coverage ratio, another important metric for the sector’s strength, reached a solid 149%.

The coronavirus pandemic poses an unprecedented risk to the banking system of any country. That’s especially true in Europe where two of the largest hit countries, Italy and Spain, have one of the poorest banking systems in Europe – Italian banks were often nationalized and recapitalized in recent years while Spanish ones suffered a similar fate, albeit the government using different tools.

The pandemic already created many victims in the economic sector too. Many companies filed for bankruptcy,with SME’s being particularly vulnerable.

Banks, as always in an economic crisis, are on the front line. If the business goes bust, the bank earns less fees from the regular banking transactions. Not to mention that any possible loans to the business sector end up as non-performing, and that threatens the banks’ liquidity.

In Spain, for example, since the start of the pandemic, millions of “autonomos” (i.e., self-employed) shut down, forcing banks to rewrite provisions both for the loans attributed to such businesses and for the loss from commissioning.

So far into the crisis, both governments and the ECB acted swiftly and provided much-needed liquidity. Moreover, solidarity prevailed – less impacted countries ran to help more affected ones.

The market, as a consequence, celebrated both the monetary and fiscal signals the authorities sent. The European banking sector is up 15% in the last two days, based on the EU common debt issuing and faith that Europe can only win the crisis if countries stick together.

Will this be enough?

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