Euro zone banks have suffered some damage so far from the coronavirus pandemic, but that could change once official support measures are lifted, the European Central Bank's top supervisor said today.
Even though the euro zone economy was severely curtailed, banks saw their bad loans fall in the third quarter of last year, thanks to unprecedented government guarantees and moratoria as well as support from the ECB itself.
But ECB supervisor Andrea Enria said there was no room for complacency and floated a proposal to manage possible failures by small and mid-sized banks, which are not currently covered by European Union rules.
"So far, the impact of the Covid-19 pandemic on banks' balance sheets has remained limited," Andrea Enria said in a speech.
"But we should not be complacent. We cannot rule out that once the government support measures are lifted, some banks may experience a significant deterioration in their asset quality," he said.
Enria said that letting smaller banks simply be liquidated or bailed out was inefficient and could endanger the stability of the financial system.
"Having an effective and integrated framework for managing crises, including for small and medium-sized banks, is essential to preserve the trust of depositors and the public at large, to avoid financial fragmentation and to safeguard financial stability," he said.
With no common European insurance on deposit in sight, he proposed a process whereby the EU's Single Resolution Board triggers a liquidation but national resolution authorities (NRA) sign off on it.
"The SRB would maintain a strong role in triggering liquidation and proposing the transfer of a bank's assets and liabilities, but the NRA would maintain the right to block the transaction if it were considered excessively expensive for the national DGS (deposit guarantee scheme)," Enria said.