Eurozone banks face additional losses of more than $283bn this year and next as continental Europe??s severe recession intensifies strains on its financial sector, the European Central Bank has warned.
The fates of the eurozone economy and its banks have become increasingly interlinked, the ECB reported on Monday in its latest ??financial stability review? with banks losses expected to be focused on their loan exposures. Risks to the stability of the financial sector remained high, it said, while ??uncertainty prevails? over the shock-absorbing capacity of the banking system.
Its comments could fuel calls for European politicians to step up the ??stress-testing? of the Continent??s banks to restore confidence in the system. Weaknesses in continental Europe??s banks have come under increasing global scrutiny recently, with finance ministers facing pressure at a G8 summit in southern Italy at the weekend to follow the lead set by the US.
Lucas Papademos, ECB vice-president, said that ??a negative interplay? between the financial sector and the economy had become clearer since the start of this year. He stopped short of calling for more rigorous stress testing or the publication of review results saying the issue ??remains the responsibility of national authorities?. The ECB, which acts as the monetary authority for the 16 countries that share the euro, is not a bank supervisor.
However Mr Papademos repeated the ECB??s plea for banks to ensure they had sufficient capital and liquidity buffers and to take advantage of government support schemes.
Despite the scale of the bank losses that the ECB saw as still facing eurozone banks, it was much less gloomy than the International Monetary Fund. An IMF report in April put expected write-downs this year and 2010 at US $750bn, although taking account of loss provisions and write-offs up until May this year would reduce that to about $540bn. The gap was due to different assumptions, for instance on the performance of loans.
