Donnery urges vigilance amid trade tensions and rising arrears
European Central Bank supervisor Sharon Donnery warned on Wednesday that euro zone banks must remain alert to the risk of rising bad loans, particularly in lending to small businesses, consumers, and commercial real estate in weaker locations. Speaking at a financial conference in Milan, Donnery highlighted growing downside risks from geopolitical instability and global trade disruptions.
Although non-performing loan (NPL) ratios remain historically low across the euro area, she said early arrears on consumer credit ticked up in the final quarter of 2024. The ECB has previously raised concerns about credit risk during the pandemic and again after interest rate hikes began in 2022. These concerns have yet to materialize at scale, but Donnery emphasized that vigilance remains essential.
Key sectors flagged as vulnerable
Donnery pointed to three key areas of concern:
- Small to medium enterprises (SMEs): These firms are the most exposed in the event of an economic downturn and could see credit deterioration if conditions worsen.
- Consumer lending: Early indicators show a rise in arrears, especially in unsecured personal loans.
- Commercial real estate: Non-prime property loans are under pressure from environmental, social and governance (ESG) shifts and declining demand.
External factors compound credit risks
The ECB cited intensifying global trade tensions and supply chain disruptions as emerging headwinds. Donnery warned that banks heavily exposed to export-oriented sectors such as manufacturing could face increased credit risk.
While the banking sector has demonstrated resilience, the ECB continues to stress the importance of robust risk management and monitoring. “Vigilance is crucial,” Donnery said, especially in the context of a rapidly evolving macroeconomic environment.
