MNI BRIEF: Growing Risks Could Test Bank Resilience: ECB FSR

Risks are building across the eurozone's corporate sector as the pandemic evolves which could test the resilience of regional banks in the future, the European Central Bank's latest Financial Stability Review notes. The extensive policy measures are helping euro area corporates and households to cope with Covid-19 fallout, but risks can arise "either from a premature end to measures or from prolonged support," the report says.

According to the ECB, premature withdrawal of fiscal support could set back the recovery, turning corporate liquidity issues into solvency issues. "The sharp rise in corporate and sovereign indebtedness increases the risks to financial stability from an emerging sovereign-corporate bank nexus in the medium-term, as banks and sovereigns alike are exposed to pandemic-induced risk faced by euro area firms," the FSR notes.

"Government support schemes are essential currently but should remain targeted towards pandemic-related economic support and avoid giving rise to debt sustainability concerns in the medium term," said Luis de Guindos, Vice-President of the ECB.