The European Union’s banking watchdog said on Thursday that banks around the EU saw a spike in soured loans to small and medium-sized businesses in the first quarter of the year, despite their continued profitability.

The European Banking Authority (EBA) said in its quarterly “risk dashboard” that over the three months leading up to March, non-performing loans (NPLs) increased, signalling the beginning of credit problems.

“Profitability of EU banks remains resilient although the sector is confronted with materialising credit risks,” the European Banking Authority stated in a statement.

“The majority of banks surveyed expect further asset quality deterioration in CRE (commercial real estate), SMEs loans and consumer credit in the next 6-12 months,” EBA said.

Although the European Central Bank started lowering rates this month, indicating that the euro zone’s peak in borrowing costs has passed, interest rates have increased significantly across the region to combat inflation.

In the next six to twelve months, EU banks anticipate a decrease in profitability due to interest rate reductions; nonetheless, loans are anticipated to increase, according to the EBA.

According to bank reports, non-performing loans increased by 2% on a quarterly basis, totaling 7 billion euros ($7.51 billion).

As a measure of loan losses, banks’ cost of risk increased to levels not seen since the COVID-19 epidemic in 2020, according to the EBA.

The relationships between banks and “non-banks,” such as insurers and investment funds, are being closely examined by regulators since there is a lack of information in this sector to evaluate systemic risk.

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The European Commission, the EU’s executive body, is debating whether additional regulations are required.

The director of the Commission’s financial services division, John Berrigan, stated on Wednesday that there were issues with banks and funds’ connections to the financial system.

“The concern is that we don’t want the banks to re-risk through another channel,” Berrigan stated at a Politico event.

But according to the EBA, most banks contend that there are little dangers associated with having direct connections with non-banks.

(Adapted from Reuters.com)

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