ECB Says EU Banks May Be In Trouble If Economic Crisis Worsens

The European Central Bank (ECB) is warning its members could face more challenges if the economic crisis deepens, CNBC reported.

“The banking sector (in the Eurozone) is in a very strong position to withstand an unprecedented shock,” Andrea Enria, chair of the central bank’s supervisory board for the 19 member states within the eurozone, told the network.

But he warned that if the crisis deteriorates then some banks would face difficulties in maintaining their compliance with the minimum capital requirements.

His comments followed the ECB’s published assessment of 86 banks which showed they can cope with the challenges posed by the COVID-19 pandemic for now. But if the economic crisis persists, the depletion of bank capital could be significant.

Enria said the eurozone’s financial sector has managed to cope with the economic downturn. In contrast to the global financial crisis, European Union (EU) lenders are part of the solution to the ongoing shock, he added.

CNBC reported stress tests on banks by the central bank found the gross domestic product (GDP) could shrink between 8.7 percent and 12.6 percent.

“The peculiarity of this crisis is that sometimes the concentration of exposure to certain sectors of the economy, for instance, is more important than other dimensions,” Enria said.

In May, the European Commission, the executive branch of the European Union, said the economy in the bloc’s member countries are on track to contract by 7.4 percent this year. The panel predicts the COVID-19 crisis will cause the deepest economic decline since the Great Depression.

“Europe is experiencing an economic shock without precedent since the Great Depression,” Paolo Gentiloni, European commissioner for the economy, said at the time.

Over the weekend, PYMNTS reported European banks are preparing to take huge losses on their loans as COVID-19 takes its toll on financial institutions. The EU’s largest banks estimated there will be at least €23 billion ($26.8 billion) in potential losses in the second quarter (Q2), according to Citigroup. That’s in addition to €25 billion ($29.1 billion) in potential defaults recorded in the first quarter (Q1).