Banks need to actively manage new NPLs
José Manuel Campa, who leads the European Banking Authority (EBA) talked about the impact of COVID-19 on the European banking sector, the new stress tests, about how the EU banks should cope with an expected increase in NPLs, while he sees little risk of a financial sector crisis.
In an interview with “Ta Nea” ’s Maria Vasileiou José Manuel Campa, who leads the European Banking Authority (EBA) talked about the impact of COVID-19 on the European banking sector, the new stress tests, about how the EU banks should cope with an expected increase in NPLs, while he sees little risk of a financial sector crisis.
“The newly launched stress test is based on a harsh adverse scenario, which takes into account the key uncertainties of the evolution of the pandemic. In the underlying methodology, we have included the moratoria measures and public guarantee schemes that were put in place by many governments. The stress test will be crucial in providing a clearer view of banks’ resilience against the downside pandemic scenarios” Campa said. “Currently, banks have managed to respond to the Covid-19 difficulties, whilst maintaining their liquidity and capital adequacy. In addition, the perception we have received from lenders as well from borrowers is that banks managed to help customers deal with the difficulties of the current situation. However, concerns persist, and it is foreseeable that an increase in non-performing loans (NPLs) will take place in the coming quarters, as well as an increase in provisioning” said the Chairperson of EBA. This year EBA celebrates its 10-year anniversary.
On the issue of NPLs Campa said “it is important to stress that for us asset quality is a key risk going forward. This is why a proper assessment of the evolution of that debt is fundamental to understand which companies are going to be able to pay their existing debt, which companies will need restructuring, which companies may find themselves in insolvent situations. These assessments need to be done individually and for that, we are pushing banks to engage with their respective debtors. There are certain sectors and certain countries that have been mostly hit by the pandemic and those are more likely to suffer, but as I said, there are a number of moratoria and public guarantee schemes provided by governments, which will help soften the negative impact of the shock in credit quality. As you know, the Commission published their NPL action plan last December, and a considerable part of this plan focuses on this assessment process”.
He stressed that his key recommendation “is an active management by the bank sector and the corporate sector of the restructuring process and the increase in NPLs in their balance sheets. To manage NPLs, there are a number of tools that can be used. One is resorting to management companies, which sometimes are also called bad banks. The Greek government already used one in the past to manage the levels of NPLs from previous crises. These schemes have worked well in many other countries. Another important aspect is to streamline the current regulation so as to favour securitisation, through which some of those assets can be sold to the markets. And a third aspect is to improve disclosure on the situation of those NPLs so that investors can better assess them so as to be able to value and price them”.
Campa also said that “at this stage, I think there's very little risk of a financial sector crisis. As I said before, the capital and liquidity levels of banks remain strong. Of course, there may be some individual cases that have difficulties, and the stress test will provide us with additional information. But the overall sustainability and robustness of the banking sector seems to be sufficient to deal with the consequences of this pandemic”.