Euro zone banks have enough capital to withstand the impact of the COVID-19 pandemic and finance the economic recovery, even though they are highly exposed to sectors hard hit by the coronavirus, the International Monetary Fund said.
“While the pandemic will significantly deplete banks’ capital, their buffers are sufficiently large to withstand the likely impact of the crisis,” the IMF said in a study. “With the right policies, banks will be able to support the recovery with new lending.”
The IMF said that based on its January 2021 projections, banks in the 19 countries sharing the euro would stay broadly resilient to the deep recession in 2020 and the partial recovery this year.
“The aggregate capital ratio is projected to decline from 14.7 percent to 13.1 percent by the end of 2021 if policy support is maintained. Indeed no bank will breach the prudential minimum capital requirement of 4.5 percent, even without policy support,” the IMF said.
The Washington-based lender of last resort stressed the importance of government support policies for banks, which include regulatory capital relief, debt moratoria, credit guarantees, deferred insolvency proceedings as well as grants, tax relief, and wage subsidies to firms.
The euro zone is already making use of such measures which so far total around 19% of GDP.
The Fund also said banks should be allowed to build back capital buffers gradually to preserve their lending capacity and restrictions on dividend payouts and share buy-backs should be maintained until the recovery was well under way.
“The EU authorities should use the current system-wide stress test, due in July 2021, to assess the need for precautionary recapitalizations,” the IMF said.