A strong banking sector will help companies and households cope with the crisis
The Financial Stability Review from Eesti Pank finds that the large capital buffers and good profitability of the banking sector will allow it to cope with the loan losses that may build up during the crisis and have money available to lend to businesses and households.
“The banking sector entered the crisis in a strong position and during the crisis it has granted payment holidays and continued to lend. The actual impact of the crisis may hit the banks over the next 6-12 months, but their financial position is strong. If the coronavirus crisis should worsen, the banks will have the capacity to continue providing payment holidays if needed”, said Governor of Eesti Pank Madis Müller.
Rapid growth in deposits and liquidity loans received from the central bank have given the banks their largest stock of liquid assets of recent years. The level of overdue loans has so far been low, but experience from earlier crises has shown that problems with loan repayments start to appear over 6-12 months. In the negative scenario of the economic forecast released by Eesti Pank in September, the share of loans at the banks that are overdue could rise from its current 0.6% to 5%. Difficulties with loan repayments have so far been avoided because the average financial position of companies and households is good, the banks have granted payment holidays, and the state provided wage support to businesses.
The Eesti Pank Financial Stability Review finds that the risks to the functioning of the financial sector next year are large though. The coronavirus crisis has hit hardest at companies providing accommodation, food, tourism, passenger transport and leisure services, but these sectors provide only a small part of the loan portfolio of the banks. Were the crisis to deepen though, problems could reach the real estate and manufacturing sectors, and in that case the banks could face large loan losses. The strong capitalisation and profitability of the banking sector will allow it to cope with loan losses though.
The ability of households to make their loan payments depends largely on how much unemployment increases by. The sectors that have been affected most by the crisis are labour intensive, and around one quarter of all those in employment work in those sectors. It is unlikely though that the banks will face large-scale loan losses, as housing loans are well secured and the declining economy has not caused a steep fall in prices in the housing market.
Eesti Pank decided proactively in spring to lower from 1% to 0% the Systemic Risk Buffer requirement that applies to the banks, so that they would be able to use that buffer to cover loan losses and issue new loans.
Alongside the risks caused by the crisis, the risks to the Estonian financial sector that come from climate change and stricter climate policy have become important for analysing longer term financial stability. The economic sectors that are most vulnerable to the risks from climate change account for 15% of the loan portfolio of the banks and 9% of the investment portfolio of the insurance sector. Eesti Pank will in future continue to map and analyse the risks to the financial sector from climate change.
Comparison of possible loan losses and the capital buffers of the banking sector
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