The European Central Bank (ECB) has reiterated its warning to banks regarding the possibility of an increase in bad loans, especially in sectors involving small businesses, consumers, and commercial real estate located in less desirable areas. Sharon Donnery, a top ECB supervisor, highlighted these concerns during a financial conference in Milan on Wednesday. Since the onset of the pandemic, the ECB has been cautioning financial institutions about the risks associated with unpaid loans.
This concern intensified with the rise in interest rates starting in 2022; however, tangible issues regarding loan repayment have not yet surfaced. Donnery pointed out that the current ratio of non-performing loans—defined as those unpaid for three months—remains at historically low levels, even though there has been a slight increase in 2024. Moreover, early warning indicators for credit deterioration have not raised alarms.
Nonetheless, Donnery emphasized the importance of vigilance in certain sectors, particularly in the context of escalating geopolitical and trade tensions. She noted that these factors introduce new uncertainties and could negatively impact financial institutions, especially those heavily invested in export-oriented industries like manufacturing. The situation appears particularly precarious for commercial property loans in what are termed “non-prime” locations, where environmental, social, and governance risks significantly influence market demand.
Furthermore, Donnery observed a rise in early arrears for consumer credit during the last quarter of 2024. She urged banks to be prepared for the potential deterioration of credit quality if the economic situation worsens. In conclusion, she stressed the necessity for banks to maintain vigilance in lending practices, particularly to small and medium enterprises, as they are likely to bear the brunt of any economic downturn.