MILAN (Reuters) – European banks must be helped to cope with an expected surge in corporate bankruptcies as the bloc emerges from the pandemic crisis, including through a more flexible definition of default, a study prepared for the European Commission said.
Despite large sums spent on stimulus, problems with the rollout of vaccines and the emergence of new variants of the novel coronavirus have delayed the European Union’s economic recovery.
Italian academic Andrea Resti, an adviser to the European parliament on banking supervision, said in a paper on how to unwind COVID-support measures for the banking system that policy tools were needed to smooth a difficult transition.
“Emergency instruments aimed at freezing payments, easing capital constraints and providing additional credit cannot simply be dismantled,” the paper seen by Reuters said.
Resti said the worst-hit industries would need time to reorganise and cut costs. Companies in general would need to deal with long-term shifts brought by COVID-19 – such as remote working – that affected the management of supply chains or real estate.
As an end to debt holidays is expected to push many European businesses towards insolvency, Resti said a more flexible definition of default would allow banks to help companies that are starting to recover.
Listing a number of policy tools, the paper said member states that invest to help courts deal with the projected rise in bankruptcies should be rewarded through an easing of the rules that dictate the pace of banks’ loan loss provisions.
At the same time, “one should not repeat the mistakes of the recent past, when private-sector investors were used as the main channel to clean-up bank banks’ balance sheets,” the study said, calling for pubic asset management companies (AMCs) to instead take on banks’ impaired loans at fair prices.
As banks across Europe move towards consolidation to help absorb the pandemic’s impact, the paper advised the pursuit of cross-border mergers and the completion of the banking union to avoid re-awaking the negative loop between bank and sovereign risks.
To this aim, banks should be encouraged to further diversify their government bond holdings.
(Reporting by Stefano Bernabei and Valentina Za; editing by Barbara Lewis)