European Central Bank (ECB) supervisory board chairman Andrea Enria has specifically called on some eurozone banks to hold sufficient capital in the face of a possible recession.
Speaking at an event organized by the European Banking Confederation, Enria said banks should consider such capital increases when announcing their distribution plans.
"From a capital adequacy point of view, we specifically ask some banks to review their capital trajectories to include sufficiently conservative and up-to-date adverse macroeconomic scenarios, including recessionary assumptions consistent with negative official projections," said Enria.
"These capital paths should be used by banks when announcing their distribution plans after having dialogued with their supervisory teams," he added.
The rise in interest rates will be benign for bank profitability, but not enough to improve it.
Banks "must focus on a broader set of actions that will put their profitability and business models at a sustainable pace for the foreseeable future", according to Enria.
Therefore, the official added: "The interest rate normalization process requires supervisory attention."
Rising interest rates generally improve banks' intermediation margins, but in an economic downturn earnings worsen due to deteriorating asset quality and a fall in net interest income.
This increases the pressure on banks' funding costs, as the ECB no longer provides them with very cheap liquidity.
In addition, there are risks of contagion if market interest rates rise in a disorderly fashion.
Source Lusa
