The ECB’s reaction to the coronavirus crisis has been to flood the market with liquidity. But your answer may not linger and move forward in creating a bad European bank to take over the toxic assets of financial institutions. This is what Moody’s believes in a recent report in which it highlights that the institution could be preparing to light a bank of these characteristics.
A sort of Sareb but at the Eurozone level, in other words, is what the rating agency considers that the European supervisor could be evaluating. This is deduced from the last words and documents of the ECB, both from the president of its Supervisory Board and from the latest review of financial stability.
On May 25, the head of the ECB Supervisory Board, Andrea Enria, forwarded a letter to Bundestag member Frank Schaffler saying that he did support the concept of bad bank in the event of a significant deterioration of assets due to Covid. So, Moody’s says, it also recognized that the ECB did not have a clear position on that … until the stability report arrived a day later. That possibility is already mentioned there to deal with the increase in non-performing loans.
“The option of a bad bank would be positive credit for European banks, because it would involve government support where it was necessary, which will help banks protect their solvency and possibly avoid bankruptcies,” says the rating agency. And he adds: «We believe that Enria’s declaration and the financial stability review of the ECB suggest that they are preparing for a scenario in which recent measures to protect banks’ CET1 (solvency ratio), such as the suspension of ividends or operating below established capital and liquidity levels would no longer be sufficient and would require stronger action such as creating a bad bank. ”
Thus, the rating company estimates that the banking supervisor seeks flexibility in the sector to help entities manage the Covid crisis. While highlighting that, in any case, it would be a difficult option to implement. .