The European Central Bank warned that bank losses in the Eurozone will continue to rise as high rates of interest hit households, businesses and companies.
ECB Vice-President Luis de Guindos stated that lenders are beginning to notice “early strains” on their balance sheets. This is due to an increase in defaults and late payments.
He said that the demand for loans “cooled exceptionally quickly”, while losses began to rise from their historic lows.
Mr de Guindos stated: “Despite their lending margins having largely benefitted from the rising interest rates until now, banks are starting to face increased headwinds.”
He said that the shift in Europe towards remote work was also affecting lenders. This was due to the higher borrowing costs for the sector of commercial real estate.
Analysts at the ECB said in their latest Financial Stability Review that “Demands for office space deteriorated dramatically in the second quarter 2023, especially in the non-prime sector where environmental concerns play a greater role.”
The report also showed that arrears less than 90-days were on the rise, as were default rates for both corporate and retail loans.
The ECB warned that defaults may increase in the coming quarters as missed payments signal future pain.
It stated that smaller firms were most affected by the worsening economy, as they fell behind on payments or stopped them altogether in the past two quarters.
According to an analysis by McKinsey and Company, the sharp rise in interest rate has so far driven profits at global banks to their highest level since 2008.
Lenders expect to generate a combined surplus of $1.4 trillion in this year. This will lead to criticism that they have not increased savings rates to keep up with the rising costs of mortgages.
The ECB stated that economic headwinds will likely slow down the momentum of banks.
The statement read: “Growing vulnerability in the real-economy can be expected, along with lower lending volume and rising funding costs may challenge their profitability prospects.”
The central bank stated that higher interest rates “test the resilience” in families, businesses and governments of the Eurozone who are already being squeezed by cost of living crises.
The banks have tightened their criteria to “historically high levels” and the lending to private companies has ceased.
The ECB warned that non-banks such as pension funds, investment funds, hedge fund and other schemes were also vulnerable to “surprises”.
It said that some firms in the area were still very exposed to sectors with high interest rates, like large, highly indebted businesses and real estate.
According to the ECB, collapses in this sector could threaten the stability of the financial system as a whole.