Most of Europe's banks 'strong enough to survive' Covid-19 economic hit

Most of Europe's banks 'strong enough to survive' Covid-19 economic hit
A machine counts and sorts out euro notes.

Most of the EU's banks are strong enough to survive the impact of the coronavirus crisis, according to ECB vice president Luis de Guindos.

“In a few days’ time, the ECB will be publishing the outcome of its vulnerability analysis of banks, which is a substitute for the stress tests,” Mr de Guindos said in an interview with the Spanish news website El Independiente. 

“There is every indication that, with this high level of solvency, most European banks could withstand a 9% fall in GDP and survive the two years it will take to return to the level of output seen before the spread of Covid-19,” he said.

Still, banks should be “extremely prudent” when distributing dividends, according to Mr de Guindos, who noted that the average capital ratio of European lenders is around 15%. 

The ECB recommendation to suspend dividend payments is geared toward preventing a credit crunch, he said.

Bank profits should not be used to pay dividends, but to further support lending.

The ECB is leaning toward extending a request to banks to restrain payouts until at least the end of the year, as several members of the supervisory board don’t see enough clarity on the economy to justify returning to dividend payments. 

Meanwhile, Bundesbank president Jens Weidmann challenged the landmark stimulus package agreed by EU leaders, emphasising the importance of controls for the funds that seek to pull the region’s economies out of the worst recession in memory. 

Mr Weidmann, who is a member of the ECB Governing Council.

In an interview, Mr Weidmann questioned aspects of the package, saying it shouldn’t serve as “a springboard for large-scale EU debt for regular household financing”. 

While the creation of the €750bn fund to address the fallout from the pandemic was the right thing to do, he said, it needs a control mechanism so that the money is spent wisely and efficiently.

“It is important that support measures are limited so that they automatically expire in the course of time and the public finances stabilise again,” he said. 

Bloomberg

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