(Bloomberg) -- The European Central Bank urged the region's big banks to do a better job scrutinizing companies' ability to repay loans and weather the pandemic, warning them of the possibility that a mountain of loans eventually sours, weighs down the banking industry and slows the economic recovery.
In a letter to banks' chief executives, the ECB's supervisory arm said it is increasingly important for banks to assess these risks now instead of waiting until it is too late when problematic loans build up on balance sheets.
Lenders have been buoyed by unprecedented amounts of support from authorities over the pandemic. They've also benefited from regulatory flexibility on delaying provisions for doubtful loans.
How some banks have been accounting for those loans has varied.
“We have been observing differences in credit risk management approaches,” Elizabeth McCaul, ECB supervisory board member, said in an accompanying blog post. Areas of concern included overly optimistic assumptions and some “worrying cases” where banks have relaxed their risk-modeling standards.
“If we delay – or worse, fail to act – we will have to pay the price of today's inaction tomorrow,” she wrote. “We would be wise to start preparing now so that we may enjoy the strongest possible conditions when those healthier days arrive.”
Read more: BOE warns of flaws in banks' ability to estimate loan losses
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