According to the ECB, banks are to prepare for a wave of loan defaults

The European Central Bank (ECB) is calling on the 'industry' to prepare for a possible wave of loan defaults as a result of the corona crisis. "Banks need to prepare for the rise of bad loans and mitigate the consequences that may occur for the time constraint of support programs," the DPA quoted the ECB as saying. Credit risk "should be considered as one of the biggest challenges facing the banking sector and supervisors in the coming months". Banks are much stronger than during the 2008/2009 financial crisis: "At the beginning of 2020, banks in the euro area were much better equipped with capital and armed against the economic downturn than during the global financial crisis." Nevertheless, the ECB calls for caution. Challenges can be found in several critical areas, but the greatest risk is a sudden increase in the number of loans that clients are unable to repay. In addition, there is a risk of price corrections in some investment categories, such as real estate markets: "Residential real estate markets in the euro area have so far resisted well, but residential real estate prices have risen again, although there are signs of overvaluation." The ECB's banking supervision regularly checks the sustainability of business models and the adequacy of banks' risk management through the Supervisory Review and Evaluation Process (SREP). Based on the results, the ECB determines the necessary increase in capital reserves for individual banks and, among other things, determines the amount of dividends. Last year, capital requirements and recommendations remained unchanged compared to 2019, averaging 14%. Since November 2014, the ECB has had direct supervision of the largest banks and banking groups in the euro area. There are currently 115 institutions, representing 82% of the 19-euro area market.