(Bloomberg) -- The European Central Bank will push lenders to ensure they’re maintaining sufficient financial reserves after finding that some banks expect only minor hits from the shock to energy markets and a potential recession.
“A number of banks seem to use relatively mild macroeconomic assumptions in their adverse scenarios, which translates into a moderate impact on their capital ratios” in calculations submitted to the ECB in late October, said Andrea Enria, the ECB’s top bank oversight official. “Supervisors will closely scrutinize capital planning and challenge management actions to ensure an appropriate level of conservatism.”
The ECB is calling for banks to prepare for the risk of a wave of losses on loans after Russia’s invasion of Ukraine caused a spike in gas and power prices and made it harder for consumers and companies alike to service their debt. Enria’s comments step up the pressure on lenders and cast a spotlight on whether the industry will have to dial back investor payout plans.
After years of low returns, banks from Italy’s UniCredit SpA to Nordea Bank Abp in Finland have been been rewarding investors with pledges distribute excess capital with tens of billions of euros in dividends and share buybacks. Enria, who spoke to European Parliament on Thursday in Brussels, didn’t name the banks which are making rosy assumptions.
Enria said banks’ risks related to energy-intensive corporate borrowers “are a particular area of supervisory attention.” While, there have limited signs of distress so far, many affected industries “are at the beginning of the value chain, where disruptions can trigger chain reactions,” he said.
Bank exposures to utilities increased by about 14% in the first nine months of the year and extending further credit to that industry might bring banks closer to their own limits on risk, Enria said. The ECB’s focus is particularly warranted given a fellow regulator recently allowed energy traders temporary flexibility to meet margining requirements, he said.
Separately, Enria said that the ECB soon publish results of a review it conducted of how banks manage counterparty credit risk. That issue was given renewed impetus after the collapse of family office Archegos Capital Management last year stung several global investment banks.
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