Eurozone Banks More Vulnerable Than US Amid COVID-19 Crisis

Morgan Stanley: "Credit Losses at Some Banks Surge to $300 Billion"

Wall Street Increases Cash Holdings Since Global Financial Crisis to Ensure Soundness

▲Christine Lagarde, President of the European Central Bank (ECB) [Image source=Reuters News Agency]

[Asia Economy Reporter Kwon Jaehee] During the COVID-19 pandemic, Eurozone banks have proven to be more vulnerable to the crisis than U.S.-based banks. While Eurozone banks have suffered from deteriorating profitability due to prolonged negative interest rates, Wall Street banks have differentiated themselves by steadily increasing cash holdings since the global financial crisis, thereby building strong liquidity and soundness.

According to major foreign media on the 12th (local time), global consulting firm Oliver Wyman and investment bank Morgan Stanley recently co-released a report forecasting that even under the most optimistic scenario of a "rapid rebound" within six months or less, all Eurozone banks are expected to face unavoidable profit declines this year. Furthermore, under the pessimistic scenario of a "severe recession" lasting more than a year, credit losses at some banks are projected to surge from $200 billion (approximately 243 trillion KRW) to $300 billion (approximately 365 trillion KRW).

Magdalena Stoklosa, a Morgan Stanley researcher, evaluated, "Pressure on Eurozone banks' profitability inevitably exposes structural weaknesses in their business models." She added, "Compared to other global investment firms, Eurozone banks will experience significant performance gaps, creating opportunities for Wall Street leaders like JP Morgan to enter the market."

The particular vulnerability of Eurozone banks in the unprecedented COVID-19 crisis is attributed to the failure of strategies pursued in a different direction from Wall Street since the global financial crisis. In the Eurozone, the European Central Bank's (ECB) prolonged negative benchmark interest rates have significantly reduced net interest margins, threatening bank profitability. Additionally, economic growth slowdown in the Eurozone has dampened investments, and non-performing loans with difficult bond recoveries have increased substantially. Strengthened financial regulations since 2008 have also constrained Eurozone banks, worsening profitability. In contrast, Wall Street banks are evaluated to have secured both liquidity and soundness with cash reserves accumulated since the global financial crisis.

Eurozone banks, which had been experiencing profitability deterioration even before the COVID-19 crisis, have undertaken large-scale layoffs since last year to cut costs. Nevertheless, profitability decline is expected to be unavoidable. Moody's has warned that the profitability gap between Eurozone banks and other banks will widen in the medium to long term.

Among Eurozone banks, Germany's Deutsche Bank and Commerzbank are identified as being in the worst positions. They are understood to have no capacity to absorb defaults if loan delinquencies progress. On the other hand, Switzerland's Credit Suisse and UBS are analyzed to have the best responsiveness among Eurozone banks, thanks to their shift in business portfolios from investment banking to asset management.

Meanwhile, according to a survey conducted by the ECB last week, the average return on equity for Eurozone banks last year was 5.2%, less than half that of U.S. banks.

This content was produced with the assistance of AI translation services.