Adverts
(Bloomberg) — The EU's leading financial institution is stepping up discussions with bank executives about their preparedness for a potential rise in corporate defaults and a decrease in energy market liquidity, amid a worsening impasse over Russian gas components.
Most Bloomberg studies
The Frankfurt-based banking watchdog wrote to lenders last month, telling them to investigate the effect of a fuel strike on their groups, according to people familiar with the matter. Responses are due by mid-September, and the observation conversations are due back later this month, referred to the individuals, who asked to remain anonymous because the interaction is not public.
Europe's efforts to avert a total energy disaster were restarted this month after Russia decided to halt supplies through its main Nord Steam pipeline to the area, in line with sanctions on Ukraine. Banks face mounting losses as the energy crisis intensifies, with many lenders' plans to provide lavish dividends to traders after lean years likely in doubt.
One after another, ECB President Christine Lagarde noted on Friday that the institution's financial hedging arm is "ready to provide liquidity to banks, not to power companies," in response to the disaster.
“In the current, very risky environment, it is essential that fiscal measures be implemented to provide liquidity to solvent taxpayers in the energy market, particularly utility companies,” she advised at a press conference in Prague.
Further examination: ECU power disaster warnings worsen. Vital fix now.‘
A spokesperson for the ECB declined to comment on the supervisory discussions.
Regulators are pressing banks to ensure they have ample reserves for personal loan defaults, targeting their most exposed buyers so clearly, due to the impact on businesses not immediately saturated with the consequences of Russia's invasion of Ukraine. Banks also need to show they can conduct stress checks and that they are updating their financial assumptions, the people said.
The story continues
Different problem areas include poorly traded energy derivatives and exposures targeted at energy traders, in addition to the fact that fewer banks are active in these areas, the Americans pointed out.
The letter to the banks also asked the institutions to detail how their assessment was taken into account in their basic approach and what the primary and secondary outcomes of a gasoline shutdown might be.
See further: All eyes turn to Ukraine's gas connection as Russia squeezes Europe.
Andrea Enria, who chairs the ECB's supervisory board, stated last year that the watchdog was asking individual banks to review their potential capital levels "to encompass sufficiently conservative and up-to-date macroeconomic situations." He signaled that there cannot be blanket restrictions on payments, given all the financial uncertainty during the pandemic.
Authorities across Europe have seen this message hammered home. Mark Branson, who heads the German regulator BaFin and sits on the ECB's supervisory board, noted this week that banks need adequate capital bonds to continue helping borrowers.
“The equipment is still powerful,” Branson stated at a Handelsblatt banking conference on Wednesday in Frankfurt. “However, in these very dynamic times, where you can’t understand exactly where the risks lie and the situation changes from week to week, you need first-class asset management, but banks also want intelligently accumulated capital and liquidity buffers and a prudent approach to that capital and liquidity condition.”
