Euro Zone Banks Warned of Bad Loans Risk

FRANKFURT (Reuters) – Euro zone banks should prepare for a rise in bad loans, especially when lending to small businesses, consumers, and commercial real estate in less desirable locations, according to European Central Bank supervisor Sharon Donnery, speaking on Wednesday.

The ECB has highlighted the risk of unpaid loans since the pandemic, reiterating concerns as interest rates began to rise in 2022, although these issues have yet to fully manifest.

Donnery pointed out that the ratio of “non-performing loans”, those unpaid for three months, remains at historic lows, despite a slight increase in 2024. Additionally, early warning indicators of credit issues have not signalled alarm.

However, she did identify vulnerable areas that banks should monitor, particularly due to geopolitical and trade tensions.

> “The current geopolitical environment adds a new layer of uncertainty and is a source of downside risk to the outlook,” she stated at a financial conference in Milan.

Donnery also mentioned that rising global trade tensions and supply chain disruptions pose risks to banks, particularly those heavily exposed to export-oriented sectors like manufacturing.

She described the outlook as “particularly challenging” for commercial property loans in “non-prime” areas due to significant impact from environmental, social, and governance risks.

Additionally, she noted that early arrears in consumer credit increased in the last quarter of 2024, emphasizing that banks need to prepare for possible further credit quality deterioration if economic conditions worsen.

Donnery stressed the importance of vigilance for banks lending to small to medium enterprises, as these businesses are likely to be most affected by an economic downturn.