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Friday, 24 November 2023 INTERNATIONAL 11
Eurozone Banks Under Strain as
Loan Defaults Rise, ECB Cautions
RECENT indicators from the European Central Bank (ECB) Guindos emphasized the broader economic implications,
reveal early signs of stress on the balance sheets of Eurozone warning of possible financial distress for overextended
banks. A surge in loan defaults and delayed payments by borrowers if economic activity disappoints or if energy
customers, attributed to rising interest rates, has prompted prices surge during the winter. Property companies, partic-
concerns about the financial stability of the banking sector. ularly in the commercial real estate sector, are identified as
vulnerable, with demand for office space declining.
While higher interest rates initially bolstered income and
profits for banks, the ECB’s twice-yearly financial stability The ECB outlined three key risks for Eurozone banks. Firstly,
review points to emerging challenges. Elevated funding costs, a combination of higher living costs, increased debt servicing
deteriorating asset quality, and reduced lending volumes costs, and economic downturns may negatively impact bank
are putting pressure on lenders, potentially impacting their asset quality.
future profitability. Secondly, reduced lending volumes due to higher lending
rates and tighter credit standards are expected to affect
The review acknowledges that the increase in defaults and banks’ profits. Lastly, the report projects a decline in profit-
late payments stems from a historically low level. Despite ability across most countries as funding costs catch up with
this, the ECB asserts that the banking system is equipped interest rates on new business.
to manage worsening asset quality, thanks to robust capital
buffers and liquidity levels. While financial markets currently appear resilient, senti-
Luis de Guindos, the ECB’s vice-president, noted that ments could shift rapidly, emphasizing the need for vigilance
although the turbulence seen in the spring has subsided, amid the evolving economic landscape. The ECB also warned
risks to financial stability persist. The report highlights the of external factors, such as the Israel-Hamas conflict, which
potential consequences of the ECB’s interest rate hikes, could potentially trigger increased risk aversion in financial
which could lead to higher borrowing costs, prompting markets, affecting energy supplies, confidence, economic
banks to set aside more funds to cover bad debts. growth, and inflation rates.
