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Euro area banks should be able to withstand even the most severe economic downturn resulting from the Covid-19 pandemic currently envisaged by the European Central Bank, a report published Tuesday showed, though banking supervision head Andrea Enria stressed there is "no room for complacency."

By the end of 2022 aggregate capital depletion for the euro area banking sector will be 1.9%, under the ECB's central scenario, the results of the Single Supervisory Mechanism's delayed sectoral vulnerability analysis concluded.

Average Common Equity Tier 1 (CET1) capital would be reduced from 14.5% to 12.6%, with the majority of banks reaching maximum capital depletion in 2022. "Under this central scenario, our opinion is that the euro area banking sector will remain, in aggregate, well capitalised and can continue to fulfil its core function of lending to the real economy," the SMM report said.

Under the more severe scenario outlined by the ECB in its June 2020 projections, with GDP contracting 12.6% in 2020, before growing 3.3% in 2021 and 3.8% in 2022, the aggregate CET1 ratio of the euro area banking sector would decline by an average of 5.7%, reaching 8.8% by the end of 2022.

This, the SSM concluded, would see several banks need to take action to continue meeting minimum capital requirements, although the overall shortfall of the sector "would be contained."

The exercise was based on data from the end of 2019. The more severe scenario foresees a strong resurgence of infections accompanied by more stringent containment measures. Both scenarios and the analysis of their impact on the banking sector took into account, as far as possible, the fiscal, monetary and supervisory measures already taken.

"There is clearly no room for complacency," Andrea Enria said in a statement, "but we can take some comfort from the fact that the sweeping regulatory reforms of the past decade have actually brought the banking sector into a position where, overall, it is sufficiently resilient to tackle a shock of a magnitude never seen before in the European Union."

Authorities must be ready to take additional action if necessary, he added.