Lagarde warns of real estate risks for eurozone banks

This Thursday, the ECB President praised the resilience of the eurozone banking system in 2023, but warned of the risks that exist this year, with an increase in bad debts and exposure of financial institutions to vulnerable sectors such as commercial real estate.

In the European Central Bank’s (ECB) annual supervisory report on 2023, published on Thursday, the institution’s president, Christine Lagarde, stressed that European banks continued to “navigate” a challenging environment in 2023, but a number of challenges remained.

“Although higher interest rates have impacted net interest margins of eurozone banks, resulting in an average return on equity of 10% in the third quarter of 2023, deposit and non-performing loan rates [crédito malparado] growing,” he says.

The ECB President stressed that “supervisors will continue to closely monitor risks”, in particular “banks’ exposure to vulnerable sectors such as commercial real estate”, and will address “concerns about bank governance and establish internal risk control systems”.

The report found that banks’ profitability improved further in 2023, but supervisors remained cautious about the sustainability of that growth and that rising provisions due to increased credit risk could weigh on future earnings.

Christine Lagarde stressed that eurozone banks last year faced a weakening economy and rising geopolitical risks, especially due to the war in Ukraine and the conflict in the Middle East, as well as tightening monetary policy, offset by the “hard work” of recent years. make banking activities more sustainable.

“Banks maintained strong capital and liquidity positions, with the aggregate Tier 1 capital ratio of supervised banks amounting to 15.6%, which is close to a record level,” he explained.

According to Lagarde, this level made it possible to protect the sector from external shocks and “for banks to easily transfer the tightening of the ECB’s policy to the economy.”

The ECB spokesperson also stated that “resilience and adaptability will be critical to addressing the structural challenges posed by climate change and digitalisation”, highlighting that in 2024 “banks are expected to meet the ECB’s supervisory expectations on climate and environmental risks and integrate these risks into your risk management strategies and processes.”

“As the use of artificial intelligence becomes more widespread, supervisors will continue to scrutinize banks’ digitalization strategies and their resilience to cyber attacks,” he said.