Banks in Spain, Italy and Portugal could record in the next two years losses of €250 billion ($338 billion) from their business loans, warned on Wednesday the International Monetary Fund (IMF).
Approximately 20% of the total balance of corporate loans is at risk of default in the three countries for which the Fund predicts economic recession this year, according to the IMF’s quarterly report on global financial stability.
Banks in Spain could face losses of €104 billion, an amount covered so far by existing reserves. For Italy, the losses would amount to €125 billion, with €53 billion exceeding the provisions, while credit institutions in Portugal would have losses of €20 billion, with €8 billion that would not be covered by provisions.
Banking sectors of Italy and Portugal could bear the costs of the losses with operating profits but without having to use existing capital reserves, the IMF estimates.
The study says that this is “an illustration of the potential magnitude of corporate risks for banking systems,” and it added: “Some banks in the stressed economies might need to further increase provisioning to address the potential deterioration of asset quality on their corporate loan books, which could absorb a large portion of future bank profits.”
IMF used the study to ask the European Central Bank to pay attention to corporate loans. Stress tests scheduled for next year will come under the supervision of authorities in the euro area.
“The forthcoming bank balance-sheet assessment and stress tests provide a golden opportunity to carry out a comprehensive and transparent evaluation across euro-area banks that could help restore investor confidence in the quality of their balance sheets,” the study reads.
The pressure on European Union declined in the last period, but it is “vital” to clean banks’ balance sheets and stop a cycle that weakened banks and businesses.
In order to estimate the losses, the Fund used data on approximately 2 million non-financial companies in the three countries analyzed.
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