FRANKFURT (Reuters) -Two European Central Bank supervisors highlighted on Tuesday some of the risks that banks face as borrowing costs rise and financial markets swing widely.
With the ECB raising interest rates at a record pace, banks are looking forward to bigger profits after a decade in which low or negative rates and modest growth have depressed their margins.
The ECB's chief supervisor Andrea Enria said most euro zone banks would do well if interest rates rose further, which typically means they can charge a larger margin when extending credit.
But he warned that some corners of the market would find things more difficult, notably lenders that are focused on consumers who may be reluctant to borrow as they struggle with a cost of living crisis.
Enria said an ECB review of a sample of banks found that most would generate bigger profits if interest rates increased by 200 basis points, even accounting for slower growth, while their capital buffers would only worsen marginally.
But he said banks exposed to consumers and the public sector would struggle more.
"Capital depletion would be higher for certain business models, such as consumer lenders and promotional and development banks," Enria, who chairs the ECB's supervisory board, told a German banking event.
In particular, a quarter of retail and diversified lenders would take a hit of more than 200 basis points to their Common Equity Tier 1 ratio, the ECB's favourite measure of a bank's capital, Enria added.
The ECB's review also found that custodian banks, corporate lenders and promotional banks were particularly sensitive to a widening of credit spreads - an increase in the premium that lenders demand when they extend credit to weaker borrowers.
Speaking at the same event, Bundesbank board member Joachim Wuermelling said German banks were depleting their reserves for market losses and may therefore take a hit if asset prices continued to fall as rates rise.
"If securities prices continue to fall, this could increasingly have a bearing on banks' income statements," Wuermelling, who sits on the ECB's supervisory board, said.
He urged banks to prepare "so that losses or provisions for expected losses don’t catch them by surprise".