European Union warns that banking sector will be affected badly due to the ongoing coronavirus crisis. Euro zone lenders could take a sizeable hit as an economic slowdown puts strain on borrowers. The memos and analysis give one of the first comprehensive, pan-European assessments of lenders in the region, as countries including Germany and Italy consider what could be done to help banks in difficulty.

In an official report the European Commission conclude there is “a risk to the financial stability of the euro area”. “Averting severe and lasting damage ... may require additional and substantial efforts,” they wrote. In the document, they highlight the impact on banks of unpaid loans and higher financing costs amid market ructions and credit-rating downgrades, concluding that although now stronger than in the past, banks remained vulnerable.

In a letter sent to the European Commission in response to its assessment, the European Central Bank said all big banks in the currency bloc were solvent but included a list showing that some countries were better cushioned than others. That data showed that Spain’s banks had the slimmest capital reserves in the currency bloc to weather any economic slump, worse even than Italy. The Netherlands and Belgium were far stronger, at the top of the table. Earlier this month, Bank of Spain governor Pablo Hernandez de Cos said the virus lockdown was having a “very harsh impact” on the economy and creating risks for banks.

The bleak assessment lays bare the vulnerability of the sector to unpaid loans or investment losses due to the virus, as some governments consider how to reinforce banks. “Ultimately, the corona shock will affect banks as well. The banks have a much higher resilience now than in the past but that will not stop them being impacted,” said Lars Feld, the chairman of the German government’s council of economic experts.

Many experts had already warned that banking sector will be the most affected sector in the recent coronavirus outbreak.

Source- Reuters