Banks in the Euro zone may struggle to repay money they borrowed from the European Central Bank because volatile markets make funding more difficult, according to the European Union’s bank watchdog.
The ECB’s Targeted Longer Term Refinancing Operations (TLTRO) had 2.1 trillion euros worth of cash. However, banks are now repaying these funds after they raised their borrowing costs.
Banks will have to repay large amounts of central bank loans by 2024. The European Banking Authority stated that banks can rely on liquidity buffers, including deposits from central banks, to repay central bank loans.
“Some banks may have to increase their deposits or issue more debt. EBA stated that it is still to be determined how expensive replacing central bank financing will prove.”
EBA stated that banks could face difficulties meeting separate requirements to issue debts that are able to be written off in times of crisis.
As the economy started to decline and people were faced with a crisis of affordability, new inflows of souring or non-performing loans increased significantly in the first half 2022. Banks had to raise provisions.
The watchdog stated that banks continue to have capital levels well beyond regulatory requirements.
With the exception of Greece, Slovenia and Romania, which are among the top performers, the average return on equity (a crucial measure of profitability) is still below what was estimated to cost, as well as Hungary and Ireland, who were laggards.
EBA stated that “in the medium-term, market participants don’t expect major profitability increases.”
($1 = 0.9493 euros)
