Banks struggle to ride to the rescue in Europe’s cash crunch battle
Corrado Sforza Fogliani is on the frontlines of European efforts to keep the region’s economy alive amid the coronavirus pandemic.
His small cooperative bank, Banca di Piacenza, in Italy’s virus-ravaged north, has been flooded with applications from customers seeking loan extensions, debt relief and renewal of credit lines.
Buried in paperwork and with Rome and banking lobbies still at odds over who should be on the hook for defaults when a six-month debt holiday ends, Banca di Piacenza’s loan officers have only been able to process a fraction of the 1,000 applications they have received.
It’s a scenario playing out in banks across the region — default fears and bureaucratic hurdles slowing down what is meant to be a swift infusion of cash for hard-pressed businesses — and it threatens Europe’s efforts to rescue its flatlining economy.
“The risk is that once we get through all this red tape the horse won’t drink because it is no longer able to,” Fogliani, Banca di Piacenza’s executive chairman, said.
Faced with its worst crisis since the second world war, Europe is relying on banks to funnel a wall of money to businesses as countries impose lockdowns to stop the spread of the virus, snarling supply chains and decimating revenues.
Lenders’ funding costs have been slashed, capital requirements have been relaxed and over 1 trillion euros has been pledged in loan guarantees and payment supports.
But for some European banks, which are still grappling with the legacy of the last financial crisis, the virus outbreak risks derailing their recovery.
Even with government guarantees, banks will still have to assume some risk of default which, on top of negative interest rates, will eat into already wafer-thin profit margins. Deutsche Bank , Germany’s largest lender, which had finally been making progress on its turnaround, warned on Friday that the virus may mean it misses its targets.
And while passing on interest rate cuts is straight forward, making snap decisions on customer creditworthiness, hard to do at the best of times, is especially difficult when lenders are facing a deluge of applications and a depleted workforce logging on from home.
The range of challenges poses a threat to Europe’s banks, whose share prices have already plumbed record lows, the companies they serve, and the broader European economy.