Crisis impact on bank balance sheets in the euro area

In its industrial policy strategy, the European Commission has merged the goal of reinforcing Europe’s industrial sovereignty and global competitiveness with its overarching objective: the twin transition to a green and digital economy. Close cooperation between the industry, governments and academia is necessary to meet these ambitions and open questions regarding the realisation and compatibility of the policy objectives need to be addressed along the way. During the pandemic, the role of the state in the EU economies has strengthened substantially. Hot political debates about normalising the market mechanism and reinstating state aid rules can be expected over the next years. Risks are that even post-COVID, there might be calls for continued exemptions to the European state aid and competition rules. This could lead to lasting distortions of the single market. [more]

Large banks in Europe have taken a substantial hit from the recession induced by the coronavirus. Their revenues dropped 5% yoy in the first half of the year and loan loss provisions spiked, essentially wiping out profits. Nevertheless, the CET1 ratio increased to 14% and the leverage ratio dipped only slightly to 4.8%. Total assets surged, driven by a massive increase in liquidity reserves at central banks, a boom in corporate lending and substantial government bond purchases. By comparison, the major US banks have weathered the crisis somewhat better so far. They remained moderately profitable, despite setting aside more funds to cover future loan losses. Their revenues grew 2% yoy, a stronger headwind from the Fed’s interest rate cuts notwithstanding. Capital ratios, however, appear less resilient than in Europe. [more]

The EUR 750 bn recovery package agreed upon by EU leaders two weeks ago will be financed through EU borrowing while the EUR 1,074 bn budget for the next seven years mainly depends on EU members' direct contributions. For the Commission to tap markets, the own resources ceiling – i.e. the maximum amount that can be called per year to finance EU expenditure – will be temporarily increased from the current 1.2% to 2% of EU members’ GNI. The Council committed itself to reform the EU’s financing system and plans to introduce new own resources for early repayment of EU borrowing. The top priority at present is swift adoption of the budget and recovery fund to address the consequences of the pandemic over the coming years. Following agreement in the Council, the MFF 2021-2027 now requires the consent of the European Parliament, in an absolute-majority vote. The decision about own resources – EU borrowing, increased ceiling and new own resources – needs to be approved by all member states in accordance with their constitutional requirements (including approval by national parliaments). While we do not expect an overall blockage of the package by the European Parliament or member states, delays cannot be excluded. [more]

EU leaders finally reached what looked impossible at times: agreement on a EUR 1.074 trillion next seven-year EU budget as well as a EUR 750 bn European recovery fund, consisting of EUR 390 bn in grants and EUR 360 bn in loans. In order to engineer consensus, Council President Michel repeatedly adjusted (downsized) his original proposal to meet the demands of frugal members. The EUR 390 bn grants facility agreed is a significant cut compared to the EUR 500 bn called for by France and Germany, but the share of grants in the Recovery and Resilience Facility (RRF) was slightly increased to EUR 312.5 bn The Council meeting that lasted from Friday to Tuesday was the first in-person conference between EU leaders since the outbreak of the Corona pandemic and took place under heightened health precautions. In the end, leaders of 27 EU members managed to find a joint response to the unprecedented economic challenges posed by the COVID-19 crisis. [more]

The coronavirus recession results in large-scale balance sheet changes both at euro-area and US banks. At the peak of the slump, lending to companies and corporate deposits surged further, while lending to households was much less affected. Banks also strongly increased their funding from and liquidity buffers at central banks. Within the euro area, funding from the ECB rose particularly in Germany and France, but remains much more important in Italy and Spain. Purchases of government bonds by US banks were smaller and started later than in the EMU. Over the next couple of months, corporate loans and deposits may gradually come down both in the US and Europe. Banks’ liquidity reserves at central banks are set to decrease, while their government bond holdings are expected to rise considerably. [more]

Governments in many countries are facing growing funding needs as they implement large fiscal stimulus packages to counter the severe economic downturn caused by the corona pandemic. Besides central banks, banks are financing more than half of the rising expenditures, which is affecting the composition of their balance sheets. [more]

Commission President von der Leyen presented the long anticipated Commission proposal for a EUR 750 bn European Recovery Instrument together with an upsized EU budget for the next seven years. The plan goes beyond the Franco-German proposal that surprised markets last week. It can be expected to cause heated debates in the European Council and meet fierce resistance from frugal EU members. [more]

European banks have taken a substantial initial hit from the corona crisis in Q1, but so far digested it relatively well. Nevertheless, more pain is surely to come. While revenues and costs were both down only mildly, loan loss provisions shot up and almost wiped out industry profits. Capital levels dropped quarter-over-quarter, yet less than feared as banks cancelled 2019 dividends. Balance sheets expanded by a record-breaking 10% compared to year-end due to growth in corporate loans, higher liquidity reserves at central banks and increased derivatives volumes. [more]

The press statement of European Council President Michel after yesterday’s video conference of EU leaders remained vague on the EU’s joint fiscal response to the COVID-19 crisis. EU leaders endorsed their earlier agreement on the EUR 540 bn package of safety nets and also agreed “to work towards establishing a recovery fund”, asking the Commission to rapidly prepare a proposal of what this requires. Interlinking the EU's recovery plan with the budget might add another layer of complexity but could also serve as a spur for rapid agreements on both matters. [more]

The banking industry in Europe is entering the corona recession with strong capital levels and ample liquidity, though still only moderate profitability. Revenues will come under substantial pressure this year, loan loss provisions will jump and net income will fall materially – many banks may well make losses. However, there is likewise massive support from the public sector, with governments propping up the real economy, central banks the financial markets and supervisors relaxing rules for banks. This should mitigate the hit. Nevertheless, the risks are profound and a prolonged shutdown could even trigger a renewed banking crisis. Enormous uncertainty regarding its depth and length notwithstanding, the current crisis may well turn out more severe than the macro-financial shock scenario underlying the latest European bank stress test. Its magnitude could possibly even exceed the financial crisis and the Great Recession. [more]

The corona pandemic and the related travel restrictions and lockdowns have caused both domestic and cross-border travel to collapse. All types of transport are affected. If the lockdowns remain in place over the summer months, traditional tourist destinations, for example on the Mediterranean, will suffer major economic losses. [more]

In their fight against the spread of COVID-19 over the last weeks, EU governments introduced temporary restrictions to border traffic of various degrees ranging from border controls to outright closure. In several cases this had a severe impact on freight traffic as border controls led to tens of kilometres of traffic jam, such as between Poland and Germany. [more]