FRANKFURT (Reuters) -Euro zone banks face rising credit risk as pandemic-related public support measures are withdrawn and may be overly complacent about valuation risks in the hunt for yields, European Central Bank supervisor Andrea Enria said on Tuesday.
Euro zone governments kept the euro zone economy afloat with lavish guarantees and subsidies, a big boost to lenders, but support is now being withdrawn and the ECB has long warned that banks may be ignoring the risks.
“Several early indicators point to potential asset quality deterioration in the future,” Enria said in a blog post as he outlined supervisory priorities for the year ahead.
“Non-performing loan ratios in sectors more vulnerable to the impact of the pandemic have also started increasing,” he said. “This is especially noticeable in accommodation and food services, and the air transport and travel-related sectors.”
Enria warned that even as asset quality is set to deteriorate, some banks are already releasing risk provisions, a worrisome trend as it indicates that loans are not correctly classified and the deterioration of the loan book is not recognised early enough.
Enria also warned that banks may be taking on too much risk as unprecedented levels of public support that has kept borrowing costs ultra low and boosted liquidity.
“This has led market participants to adopt a complacent attitude which is becoming increasingly evident,” he said. “The search for yield has led to stretched valuations in several market segments, sometimes disconnected from economic fundamentals.”
The growing appetite for risk has also driven up banks’ exposure to the shadow banking sector, which includes such firms as investment and money market funds, Enria said.
“We will increase our supervisory attention to risks posed by the excessive search for yield,” Enria said.
(Reporting by Balazs Koranyi; Editing by Alex Richardson, Robert Birsel)