COVID-19 relief loans in EU top 870 billion euros, says banking watchdog

By Huw Jones

LONDON (Reuters) - Bank loans totalling 871 billion euros (778.9 billion pounds) benefited from COVID-19 relief measures in the European Union, the bloc's banking watchdog said on Friday, in its first assessment of the potential pipeline for problem loans.

Moratoriums or relief measures such as payment holidays and government guarantees were rushed in after economies went into lockdown in March to fight the pandemic.

Around 17% of loans subject to relief measures were classified as 'Stage 2' by the end of June, meaning banks are required to start making provisions for potential losses -- more than double the share for total loans, the European Banking Authority said.

"Banks should remain vigilant and continuously assess the asset quality of these exposures," the watchdog added.

Banks in Cyprus, Hungary and Portugal had the highest share of total loans subject to relief measures, with banks in France, Spain and Portugal having the highest volumes.

The 871 billion euro total represents 6% of banks' total loans across a sample of 130 lenders, with 16% of loans to small companies granted moratoriums, followed by 12% of commercial real estate loans and 7% of mortgages, the EBA said.

Around half of the loans under moratoriums were due to expire before September, with 85% of the loans due to expire before next month.

Graphic: EBA Moratoria 1 - https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkllqmvm/EBA%20Moratoria%201.pngRisks of a "cliff edge" effect as moratoriums expire, coupled with a prolonged downturn, might lead to a sudden significant increase in the level of non-performing loans, the EBA said.

It noted that the second wave of COVID-19 had already led some countries to extend moratoriums beyond year-end, but warned: "The continuation or persistence of moratoria may also have the side-effect of potential systemic risk for financial stability, as borrowers may develop a ‘non-paying’ culture."

The EBA will publish the results of its Transparency Exercise to provide detailed bank-by-bank data on loans on Dec. 11.

Graphic: EBA Moratoria 2 - https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqoodzvx/EBA%20Moratoria%202.png

(Reporting by Huw Jones; Editing by Catherine Evans)