As pandemic-related public support measures are phased out, Eurozone banks face increased credit risk and may become overly complacent about valuation risks in their pursuit of yields, said European Central Bank supervisor Andrea Enria.
With costly guarantees and subsidies, Eurozone governments kept the Eurozone economy afloat, providing a significant boost to lenders. However, support is gradually being withdrawn, and the ECB has long warned that banks may be ignoring the risks.
Enria outlined supervisory priorities for the coming year, saying, "several early indicators point to potential asset quality deterioration in the future."
"Non-performing loan ratios in industries more vulnerable to the pandemic's impact have also begun to rise," he said. "This is notably visible in accommodation and food services, as well as the air transport and travel-related industries."
Even as asset quality deteriorates, Enria warns that some banks are already releasing risk provisions, which is a concerning trend because it suggests that loans are not properly classified and the deterioration of the loan book is not recognised early enough.
Enria also warned that banks may be taking on too much risk as a result of record amounts of public support, which has kept borrowing costs ultra low and increased liquidity.
"As a result, market participants have taken on a complacent attitude that is becoming increasingly apparent," he said. "The pursuit for yield has resulted in inflated values in a number of market segments, which are sometimes disconnected from economic fundamentals."
The rising appetite for risk has also increased banks' exposure to the shadow banking sector, which includes such businesses as investment and money market funds, Enria said. "We will intensify our supervisory focus on the risks posed by the excessive search for yield."