Eurozone banking system remains flexible despite destabilization of energy and commodity markets

The eurozone banking system remains “flexible” despite the destabilization of energy and commodity markets as a result of the Russian-Ukrainian conflict, according to the semi-annual financial stability report published by the European Central Bank (ECB).

Even if the economy develops under the “hard-to-fail” scenario, which implies a decline in eurozone GDP over the next three years, banks, which account for more than 75% of the assets of the entire sector, will maintain a key capital adequacy ratio above 9%. Only banks, which account for slightly more than 8% of the sector’s assets in the region, are waiting for this indicator to fall below 7%.

According to ECB Vice President Luis de Guindos, the Russian-Ukrainian conflict has heightened risks to financial stability, as it has affected virtually every aspect of economic activity and financial conditions.

The ECB also expects corporate defaults to rise, noting that high inflation and a slowdown in economic growth are hitting companies already weakened by the coronavirus pandemic.

The current environment is particularly challenging for airlines and hospitality and restaurant businesses that have not yet recovered from the restrictions imposed due to COVID-19, the ECB said.

“These problems are exacerbated by the prospect of tightening financial conditions, which will negatively affect the ability of companies to service debt obligations,” the report says.

In addition to commodity markets, which faced earlier stress, a “potential correction” in the face of accelerating inflation and weakening economic growth awaits a number of other assets, warn the ECB.

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