MNI BRIEF: Banks Should Ready for NPL Spike - ECB's Enria

Banks must be prepared for the impact of the coronavirus pandemic before it shows up on their balance sheets, Andrea Enria, chair of the European Central Bank's banking Supervisory Board said Tuesday, as he repeated calls for a euro area bad bank to deal with the likely rise in non-performing loans. Anecdotal evidence suggests only a small fraction of borrowers are currently showing signs of distress, Enria said, but with Covid-19 infections on the rise the macroeconomic outlook is "fraught with uncertainty."

A "severe but plausible scenario" is that non-performing loans (NPLs) at euro area banks could reach €1.4 trillion, Enria added, and he urged banks to "brace for the impact now." Banks should take steps to align their capital projections to sufficiently conservative scenarios and move ahead with well-defined strategies for asset reclassification in the face of heightened risk, he continued, with ECB banking supervisors monitoring their efforts "closely," Enria told the Handelsblatt European Banking Regulation Conference.