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European Banks Warned Loan Defaults Could Skyrocket Amid New Pandemic Lockdowns

The chair of a new European banking authority is warning lenders to prepare for an onslaught of bad loans due to the second wave of COVID-19 lockdowns, the Financial Times reported on Wednesday (Nov. 11). 

Elke König, chair of the new European Banking Union resolution authority — the Single Resolution Board (SRB) — said banks have to figure out which loans are more likely to be viable. She didn’t agree with the European Central Bank’s assertion that the EU should develop a web of “bad banks” to handle higher non-performing loans (NPLs).

König urged the EU to coordinate state aid rules for handling “embattled banks” with its “resolution regime,” which is intended to prevent widespread financial disasters, she said in an interview with FT. 

Due to the different crisis regulations among EU banks, the agency is working with a “patchwork” of agreements as the surge in NPLs looms. 

König said it was too soon to evaluate just how bad the situation with NPLs would end up. State guarantee schemes were “shielding” lenders, she added.

She anticipates the deluge of NLPs will hit during the first two quarters of 2021. She told banks “be aware NPLs are coming and the best thing to do is address them early … That is the best thing we can do for the time being, and then it is steering through the fog.”  

The European Commission is preparing its own plans and will have a policy sometime in December. Valdis Dombrovskis, executive vice president overseeing economic policy, told FT that the “likely rise” in NPLs includes the secondary markets that buy and sell bad loans.

The ECB has pushed for an European “asset management company” or a network of them, to handle NPLs but König was against the notion.

“The entire debate … always lacks one component: who is footing the bill,” she told FT, adding, “it feels sometimes as if this is the magic system,” one where losses are supposed to evaporate, something “that is not going to happen.”

It is necessary that lenders get “full transparency” of high-risk portfolios. “They need to be able to separate a portfolio and to set out how they would like to service it, what would be their idea, how would they deal with it,” she said.

Eu banks in July estimated that second quarter losses could be as high as $26.8 billion, on top of quarter one losses of $29.1 billion.

Hope for economic recovery was dashed in October when Europe mandated a second wave of lockdowns for the month of November, amid a tidal wave of new COVID-19 infections. 

By Oct. 19, confirmed cases in Europe topped 7.2 million, according to data from the World Health Organization. John Hopkins University data indicated that the U.S had 7.9 million and India, 7.3 million. As of Wednesday (Nov. 11) global cases hit 51.7 million; global deaths reached almost 1.3 million, per Johns Hopkins.

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