The European Central Bank (ECB) has said that Eurozone banks
face additional losses of more than $283 billion (€203
billion) this year and next, with a consequent reduction of
funding which could lead to further troubles for the leasing
industry.
According to the ECB’s latest financial stability review, there has
been “a significant increase in the range of estimates of potential
future write-downs and losses that banks will have to absorb before
the credit cycle reaches a trough”.
Consequently, the report continues, banks are “cutting costs and
tightening credit standards on new lending,” resulting in some
investments and purchases not being made, thus hampering
growth.
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Impaired liquidity of many financial markets has also meant that
central banks and governments are developing policies to ensure
credit is flowing once again, the review said.
These have included reduced policy interest rates to
unprecedented lows, and capital injection and guarantees of bank
liabilities.
According to the ECB, it was generally agreed that these remedies
were effective in alleviating the stresses on the financial
systems. However, it said it is too early to assess the impact on
longer-term funding and capital needs of banks, or the extent they
have fostered bank lending to the private sector.
It added that if the downturn proves to be worse and more prolonged
than currently expected, it will mean further erosion of capital
bases, increased lack of confidence in the banking system, the
balance sheets of insurers being further strained, and the
possibility of more widespread asset price declines.
The ECB said that banks need therefore to ensure that “they have
adequate capital and liquidity buffers to cushion the risks that
lie ahead while providing an adequate flow of credit to the
economy”.
Abdus Shuman
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