The EU is ignoring bank risks in its periphery
A primarily national approach to post-Covid bad debt has cut adrift states such as Greece and Portugal, making future banking crises more likely.
As a new vintage of bad debt ripens, supervisors at the European Central Bank (ECB) are walking a tightrope between allowing banks to argue that everything is alright and spurring policymakers in Brussels into action.
But the European Commission’s strategy for dealing with a post-Covid build-up of bad debt, published in mid-December, falls well short of chief ECB supervisor Andrea Enria’s wishful push for an EU bad bank.
The plan did not even include common funding for national bad banks. Its most notable new idea is for a single European data hub on non-performing loans to be built on an existing European DataWarehouse of securitization assets.
Part of the reason for this torpor is the lack of clear indication, so far, that banks need to write off anything like as much as Enria’s warning of potential Covid-19 loan losses of €1.4 trillion. Indeed, partly thanks to Enria’s dividend ban, the sector’s average capital ratio is stronger than it was before the pandemic.
However, disregarding the gravity of the risks neglects a clearer reality in weaker member states, especially in southern Europe.
Brussels may be turning a blind eye to festering risks in these countries, encouraging them to defer their problems until such time as the economy in the core is back on its feet – even if that means, in a familiar pattern, that the periphery’s crisis goes on for much longer.