ECB braces for hits to banks’ loan books as Ukraine war intensifies

Bloomberg

The European Central Bank is concerned that lenders’ balance sheets could suffer a series of hits after Russia’s invasion of Ukraine plunged the global economy and markets into turmoil.
The regulator has told banks to assess whether they need to set aside money for potential losses not just on loans to Russian firms, but also on lending to companies that are less directly affected by the war and sanctions or which do business in Russia or Ukraine, according to people familiar with the matter.
The ECB also indicated to banks that they should be prudent in terms of gauging the risks and that accounting principles require them to take upfront provisions when default probabilities rise, the people said. It hasn’t formally pushed banks to build additional reserves to cover such losses, they added, asking for anonymity to discuss internal information.
An ECB spokesman declined to comment.
The regulator’s efforts show increasing concern over the potential widespread impact of the war on Europe’s banking industry. One banker said the intelligence-gathering is reminiscent of questions his firm fielded in the early days of the pandemic. At that time, the ECB granted banks unprecedented capital relief to help them swallow losses, while also issuing a de facto ban on dividends and share buybacks.
There’s no indication yet that the watchdog will follow that playbook to deal with fallout from Russia. With banks weathering the worst of the pandemic, the ECB has lifted the dividend curbs and decided to let relief measures expire, meaning lenders won’t be allowed to dip into non-binding capital buffers next year.