Increased credit risk
European banks have proved resilient in the face of recent stresses in some advanced economies outside the euro area, but higher funding costs and worse asset quality may weigh on profitability, warns the EU central bank report. Furthermore, some signs of rising credit risk are already becoming apparent in credit portfolios most sensitive to cyclical downturns, such as those with exposures to commercial real estate, SMEs and consumer loans. The result? Banks may therefore need to set aside more funds to cover losses and manage their credit risks. In this context, it is essential to complete the banking union and, in particular, to establish a common European deposit insurance scheme. Furthermore, vulnerabilities in the non-bank financial sector require a decisive and comprehensive policy response in order to further increase confidence in the financial system and its ability to resist risks.
The recent tensions in the banking sector in the USA and in Switzerland
But overall, "euro area banks have remained resilient in the face of recent banking sector tensions in the United States and Switzerland, thanks to their solid capital and liquidity positions". The report from Frankfurt is reflected in the words of the governor of the Bank of Italy Ignazio Visco: the institutes are "overall in a sufficiently good condition but the uncertainty about the economic prospects calls for prudence". Visco underlined that a slowdown in growth is on the way while the ECB tightening will increase impaired loans and "value adjustments, which are still low at the moment". Visco claimed that the conditions of the sector are the result of ten years of recovery, "a result that many observers, even authoritative ones, doubted could be achieved". Italian banks are «as a whole», «in sufficiently good conditions» «but the uncertainty about the economic prospects calls for prudence».