A waiter stands near empty tables outside a restaurant in St Mark’s Square after the Italian government imposed a virtual lockdown on northern Italy, including Venice, in an attempt to contain an outbreak virus, in Venice, Italy, on March 9, 2020.
Manuel Silvestri | Reuters
European banks are under intense pressure as the coronavirus shuts down all major economies, at a time when these institutions were still grappling with problems inherited from the 2008 financial crash.
Lenders in the region have undergone a massive transformation since 2008 by increasing capital positions and complying with more stringent regulations. They nevertheless struggled to regain their pre-crisis market levels. The European banking index was still down more than 50% from March 2008 to the start of this year. Virus-fueled sales in global markets mean the same index is now down 70% from March 2008.
“European banks remain vulnerable and fragile in the face of financial and debt crises and the coronavirus crisis is once again hitting the financial sector, exacerbating investor uncertainty,” Athanasia Kokkinogeni, senior analyst for Europe at the DuckerFrontier research firm.
One of the main problems inherited from the crisis is the level of bad debts, which includes loans for which the borrower is in default. The latest figures from the European Banking Authority (EBA) show that in June 2019, the weighted average bad debt ratio stood at 3%, compared to 6% in 2015.
However, the coronavirus outbreak is expected to exacerbate this level of bad loans on bank balance sheets, as many small and medium-sized businesses have been forced to close and will struggle to repay their debts.
“The banking sector appears to be better equipped to deal with shocks than in 2008 if we look at capital ratios,” Maartje Wijffelaars, economist at Rabobank, told CNBC by email.
“That said, in most euro area member states, non-performing loan ratios are still higher than in 2008, even though they have fallen considerably since their peak,” she added.
German Bank, the struggling German lender said on Friday the coronavirus outbreak is likely to hurt its financial targets for the year.
“We could be seriously affected by a prolonged downturn in the local, regional or global economic situation,” German Bank said in a report. The bank also said it was difficult to predict the full extent of the impact at this point.
Credit Suisse also said this week “the impact of the pandemic on our financial results going forward remains difficult to assess,” but it is monitoring its “credit exposures” as the virus spreads further.
Another legacy problem that banks face is low interest rates. The European Central Bank (ECB) has kept interest rates at record levels since the height of the sovereign debt crisis in 2011. European lenders have repeatedly complained that this continues to squeeze profits.
In addition to their long-standing problems, the virus is also creating new challenges.
Italy, Spain, France and Belgium are just a few of the countries in Europe that are in total containment. This means that the business activity is significantly lower. People don’t go out, schools are closed, and the self-employed may have less income. Airlines have shut down most of their activities and the entire tourism industry, from hotels to museums, is at a standstill.
“With most of Europe stranded, declines in trade activity and demand in the euro area are expected to prove to be at least as sharp as those seen during the global financial crisis,” Davide Oneglia told CNBC , economist at the TS Lombard research firm.
“We believe the risks of a credit crisis remain high in the euro area. That would not let the banks get away with it,” he said, despite recent ECB stimulus measures.
The the central bank buys public and private bonds totaling 750 billion euros ($ 802 billion) this year to reduce the economic impact of the virus. Eurozone governments have also stepped up support for households and businesses.
However, without a clear end in sight, the ECB and individual governments may have to open the taps even further to deal with the outbreak.
A man rides a bicycle in front of the Altare della Patria – Vittorio Emanuele II monument in Piazza Venezia in downtown Rome on March 10, 2020.