The coronavirus pandemic has amplified existing vulnerabilities of the financial sector and eurozone banks are likely to face significant losses, the European Central Bank (ECB) said on Tuesday.
Even as infection rates fall in many countries, the impact of the pandemic on the economy and markets has exposed and increased the existing vulnerabilities of the eurozone’s financial stability, the ECB said in its biannual financial stability report.
Policy measures taken in response to the crisis have averted a financial meltdown, but the repercussions of the pandemic on prospects for bank profitability and on medium-term public finances need to be addressed so that the financial system could continue to support economic recovery, said ECB Vice President, Luis de Guindos, in a statement.
Although all eurozone countries have rolled out fiscal packages to support households and companies, the ECB noted that the increase in public debt levels could trigger a reassessment of sovereign risk by market participants and reignite pressures on more vulnerable sovereigns.
Banks that had already been struggling with low profitability before the pandemic are likely to face further pressure this year.
Mirroring changes in expectations for corporate earnings and income generation, the return on equity for eurozone banks in 2020 is expected to be “significantly lower,’’ the ECB said.
The ECB recommended that banks temporarily refrain from paying dividends or buying back shares to strengthen their capacity to absorb losses and avoid deleveraging.