ECB to ask banks to calculate with recession risk: Enria

People walk through the City of London financial district during warm weather in London, Britain, June 17, 2022. REUTERS/Henry Nicholls

June 30 (Reuters) – The European Central Bank plans to ask euro zone lenders to factor a possible recession into their business plans and will use this new calculation for approving dividend payout proposals, ECB bank supervisor Andrea Enria said on Thursday.

The ECB continues to project solid economic growth for this year and next but has argued that an escalation of Russia’s war in Ukraine, which could lead to a cut off in gas supplies could in an adverse scenario drag the euro zone into a deep recession next year.

“We will propose to ask banks to recalculate their capital trajectories under a more adverse scenario, including also potentially a gas embargo or a recessionary scenario, and use this also for the purpose of vetting their distribution plans going ahead,” Enria told European Parliament committee.

This proposal will be discussed by the ECB’s supervisory board next week, Enria told parliament’s Committee on Economic and Monetary Affairs.

While a gradual rise in interest rates, as proposed by the ECB, would generally benefit banks, Enria warned that there was also a risk of a more abrupt, disorderly increase in rates, which would then hit clients, especially in the case of high leverage.

“The current environment, however, is marked by increased volatility and lower equity valuations, as markets anticipate that the profitability and asset quality of banks may be affected by adverse macroeconomic developments,” Enria said.

For now though, net fee and commission income, and trading results are solid, leading to positive trends in net operating income, Enria said.

Reporting by Balazs Koranyi; Editing by Toby Chopra

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