The ECB’s supervisors are far from giving the all-clear. After the lockdown, a wave of bankruptcies and loan defaults threatens and the banks in the euro zone are already lagging behind their American competitors.

Closed department stores on Frankfurter Zeil: The sales losses in retail can still affect the bank balance sheets.

Dhe Corona crisis has further weakened the profitability of European banks. As the banking supervisory authority of the European Central Bank (ECB) announced on Monday, the return on equity of the 112 most important institutions in the euro zone fell to 1.53 percent in the fourth quarter. A year earlier, the profitability was 5.16 percent. The low profits have long been a cause for concern for the supervisors of the ECB and their boss Andrea Enria, because the banks in the euro zone lag far behind their American competitors.

That is why Enria regularly advocates consolidation among European banks so that more powerful institutions with increased profitability and higher market values ​​emerge. The prospects for earnings in the current year have not improved due to the still necessary lockdown measures and the restrictions in the economy. The ECB supervisors have urged banks several times over the past few months to exercise caution when dealing with credit risks.

However, this cannot yet be read in the ECB’s now published banking statistics in the fourth quarter of 2020. Because the rate of non-performing loans has fallen to 2.63 percent after 3.22 percent twelve months earlier. In total, at the end of 2020, the books of the largest banks in the euro area had bad debts amounting to 444 billion euros. A year earlier it was 506 billion euros in bad loans. In November 2014, when the ECB banking supervision was launched, it was more than 1 trillion euros.

Expectations are no longer quite so gloomy

At least Enria no longer fears the worst credit risk scenario. Last year, he thought that bad loans could rise to up to 1.4 trillion euros if economic output in the euro area, i.e. gross domestic product (GDP), collapsed by 10 percent. “The probability that this unfavorable scenario will occur has decreased according to recent forecasts,” wrote Enria in early 2021 in response to a request from FDP member of the Bundestag Frank Schäffler.

Despite the pandemic, banks were also able to improve their capital adequacy in the fourth quarter. According to the ECB, the core capital ratio – the ratio of equity components that are immediately liable in the event of losses, such as shares or retained earnings, to risky balance sheet items such as loans – rose to 15.6 from 14.9 percent.

During the Corona crisis, the banks were helped by the good development on the capital markets after the crash in March 2020. The rating agency Standard & Poor’s (S&P) expects robust earnings for the banks in the capital market business again this year. However, these are likely to be between 5 and 10 percent lower than in the previous year.