A top European Central Bank (ECB) official lamented the health of the European banking sector, calling for greater integration and risk sharing across the eurozone.
The return on equity for eurozone banks fell to 0.01% at the end of the second quarter from 6% a year earlier, according to Isabel Schnabel, a member of the ECB’s governing council.
Commercial bank reporting of non-performing loans tends to lag the onset of a recession by several quarters, she added, noting that the winding down of government loan guarantees implemented over the spring could add to the volume of bad loans over the medium term.
Schnabel’s comments came in a virtual panel discussion at the Single Resolution Board Annual Conference. Bank of England Governor Andrew Bailey also participated, giving a more upbeat assessment of the health of UK banks.
In the first real test of enhanced capital buffers imposed after the financial crisis, “the banking system has supported the economy rather than the other way around”, he said.
The BoE governor steered clear of the topic of negative interest rates, after conflicting statements about the efficacy of such policy from members of the Bank’s Monetary Policy Committee. He did, however, insist that the BoE is “not out of firepower” should the economy continue to suffer from Covid-related shocks.