ECB tells banks to plan for Russia’s invasion of Ukraine

The European Central Bank is concerned that the balance sheets of its lenders could be affected en masse after Russia’s invasion of Ukraine sent the global economy and markets into turmoil.

The regulator has asked banks to assess whether they need to set aside funds for potential losses not only on loans to Russian companies but also to companies less directly affected by the virus. war and sanctions or doing business in Russia or Ukraine, according to people familiar with the matter.

The ECB, led by Christine Lagarde, has also indicated to banks that they should be prudent in their risk assessments and that accounting principles require them to make provisions before the probability of default increases.

It added that it informally prompts banks to build up additional reserves to cover such losses, and requested anonymity to discuss inside information.

An ECB spokesman declined to comment.

Irish banks including AIB, Bank of Ireland and Permanent TSB have reported financial results for 2021 in recent weeks, boosted by the so-called write-off in 2020 in anticipation about Covid-related losses did not materialize.

Irish banks have limited direct exposure to Russia or Ukraine but are likely to be hit by the smog from war if rising fuel and wheat prices hurt economic growth.

Regulatory efforts show an increasing number ofserious about the potential spillover effect of the war on Europe’s banking industry. One banker said the intelligence gathering was reminiscent of questions his company asked in the early days of the pandemic.

At the time, the ECB granted banks unprecedented capital reductions to help them swallow losses, and enacted a de facto moratorium on dividends and share buybacks.

There is still no indication that the watchdog will follow through with that book in response to fallout from Russia.

With banks facing the worst of the pandemic, the ECB lifted dividend limits and decided to let bailout measures expire, meaning lenders will not be allowed to get their hands on non-binding buffers next year.

However, some companies are taking a cautious approach to shareholder payouts due to the uncertainty. Raiffeisen Bank International, the bank that poses the greatest risk to Russia relative to its financial reserves, has paused its 2021 dividend payment.

UniCredit, which has a unit in Russia, said it was “taking a prudent and sustainable approach” to its distribution operations.

In view of the quadratic effect on the loan book, the ECB is also asking banks about their data and expectations about how individual companies and sectors of the economy might perform as supply chains The response was interrupted and commodity prices spiked.

The ECB will use that input, along with analysis from its own economists, to estimate the damage the banking industry could face, one of them said.

One area where banks are looking for potential stress is in small suppliers to automakers and other manufacturers who are facing production shutdowns because of disruptions from the war. of Russia in Ukraine, according to an unnamed banker in a discussion with a client.

Many of those companies have seen their reserves hit by the pandemic, the banker said.

The ECB has also stepped up efforts to monitor compliance with sanctions after EU High Commissioner for Foreign Affairs Josep Borrell announced the new measures. ECB tells banks to plan for Russia’s invasion of Ukraine

Fry Electronics Team

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