Chapter 22: Two Questions on the Banking Sector After the Pandemic Hit

The pre-pandemic state of the EU banking system was determined by several intertwined elements related to structural, economic, and policy factors. In view of these characteristics, this chapter discusses the potential impact of the pandemic shock on the EU banking system, focusing on the risks arising from the weakening performance of non-financial corporations and the related decline in bank asset quality. It reviews two key concerns related to the banking sector that the COVID-19 health crisis has brought to the forefront: the outlook for non-performing loans and bank profitability. Considering the financial soundness of the different sub-sectors within non-financial corporations along with the size of the COVID-19–related shock, we find that retail and wholesale trade sectors could face most challenges to absorb the shock. These challenges could further translate into an increase in non-performing loans on banks’ balance sheets, higher impairments, and drag on bank profitability.