The European Systemic Risk Board (ESRB) has warned that "the threat of a wave of insolvencies looms large" unless EU member states shift from loan supports to targeted efforts to keep companies solvent and restructure debt for viable firms.
The ESRB was established during the financial crisis in 2010 and is made up of ECB officials and financial regulators from member states.
It is chaired by European Central Bank President Christine Lagarde.
In its statement today, it says that non-financial firms are under "enormous financial strain" due to Covid-19.
The ESRB It says policies like debt moratoria, loan guarantees and public loans have prevented a large wave of corporate insolvencies but reliance on these schemes may have made solvency problems greater as troubled companies accumulate more debt.
Corporate debt levels have increased in many member states since the onset of Covid and the ESRB said this "debt overhang increases the risk of a large wave of insolvencies and a protracted, slow recovery."
It is urging a shift to more focused support from governments targeted at the worst affected sectors with stricter eligibility rules under EU state aid guidelines.
When loans are restructured, the ESRB said the interest of public bodies and banks must be "aligned" and that banks will have to bear some of the costs.
It says governments should follow policies that help companies adapt to change rather than return to the "pre-pandemic economy".
In a report earlier this month, the Central Bank found that up to a quarter of Irish small and medium sized enterprises were vulnerable to liquidation once the pandemic ends and normal insolvency conditions return.