The President of the European Central Bank (ECB), Christine Lagarde, did not dwell long in praising the ECB's banking supervision and its work.

She used her opening speech at a conference of the ECB banking supervision on Tuesday to urge banks to be more careful when dealing with credit risks.

Because it is currently far too early for Lagarde to give the all-clear.

The full effects of the pandemic would only gradually become apparent and could challenge credit risk management.

Markus Frühauf

Editor in business.

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Government relief measures and regulatory relief may have obscured the underlying creditworthiness of debtors. If these measures were to expire and the actual financial condition of the companies was disclosed, this could affect the credit quality. Lagarde referred to leading indicators such as deferred loans, which were already pointing to a deterioration. It was only after a delay of several years that the final effect on non-performing loans could be determined, and this depends on the dynamism of the economic recovery.

"We are very vigilant," said Ana Botín, chairman of the board of directors of the major Spanish bank Santander.

According to her, the focus is primarily on the sectors that have been particularly hard hit by the pandemic.

This includes tourism, which is very important for Spain and which the lockdowns had particularly restricted.

At the same time, Botín stressed that not all areas of the economy had suffered from the pandemic.

"Margin effect prevails"

The head of ECB banking supervision, Andrea Enria, spoke about the very low interest rate environment. The extremely low interest rates would meanwhile burden the European banks more than they benefit them. According to the Italian, this negative effect on interest rate margins is likely to continue for a while. "It is true that the margin effect has been prevalent lately," said Enria. He pointed out that the banks had succeeded in compensating for the negative interest effect through trading income and higher commission income. Despite the diversification of the sources of income, the banks would have to address the burdens of the very low interest rates with a view to their cost structures and business models.

Enria once again stated how necessary he saw the completion of the European Banking Union. In her speech, Lagarde had also previously pointed out the importance of common rules in order to avoid regulatory arbitrage. Enria explicitly referred to a joint deposit insurance scheme in Europe, which could also facilitate the cross-border movement of capital and liquidity between parent companies and subsidiaries of a banking group.

A joint deposit insurance has so far met with resistance in Germany because it requires a reduction in the number of default-endangered loans on bank balance sheets. This is to avoid communitisation of the risks. Lagarde referred to the successes of European banking supervision, for which the ECB has been responsible since 2014. Since then, the return on equity has increased significantly and the problem loans on the balance sheets have been reduced by around 50 percent. Her predecessor Mario Draghi, now head of government in Italy, where the banks are still burdened with bad loans, had already advocated the joint European deposit insurance scheme.

Enria praised European banks for using the pandemic to address deeper-seated issues that weakened their profitability versus American competitors.

Your profitability has developed well recently, he was satisfied.