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By Luke Heighton
     FRANKFURT (MNI) - it is too early to discuss the creation of a eurozone bad
bank, and hopefully it will not be necessary, the chair of the European Central
Bank's single supervisory board said in an interview published Tuesday, saying
an increase in nonperforming loans was "inevitable" as a result of the Covid-19
crisis.
     Europe's banking system has held up well so far, he continued, but a second
wave of infections requiring a reintroduction of lockdown conditions would have
"far greater repercussions on banks' balance sheets," while low profitability
will increase as a result of the severe recession," Andrea Enria told Il Sole 24
Ore
     While it was difficult to predict the level to which NPLs are likely to
increase, it is inevitable the situation will deteriorate, he said.
     "Banks will need to be careful, especially those that haven't had major
problems with NPLs over recent years and don't have experience with the
guidelines applied by the ECB."
     Italy's banking system is "not out of step" with the rest of the EU, and is
now approaching the average capital strength of European banks. However NPLs
account for 6.7% of Italian banks' balance sheets compared with a eurozone
average of 3.2%.
     Divergences in the levels of support provided by national governments were
a cause for concern, Enria said, since "without integrated policies at the
European level, there will be further market fragmentation," while contributing
to the "dangerous dependency between state and banks."
     The worsening of already declining profit margins means the post-Covid-19
period "can be nothing other" than an opportunity for cost-cutting,
restructuring and mergers, Enria said.
     While there have been suggestions the ECB would discourage mergers by
imposing higher capital requirements, "this is not the case, as will be
confirmed by guidelines that we plan to issue soon [...] We take a favourable,
albeit cautious, view of mergers," he added. "We are not pushing for
consolidation at all costs."
     Banks will be given sufficient time to return to the prudential
requirements applicable to normal lending activities, Enria said, with an
"indication" of the path to post-crisis adjustment likely some time in July. The
recommendation that banks suspend dividend payments and share buy-backs was a
temporary and exceptional measure, Enria added, and would be removed "as soon as
there is greater certainty."
--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$X$$$,M$$EC$]