luis de guindos : euro area banks in the recovery speech by mr luis de guindos, vice - president of the european central bank, at the frankfurt euro finance summit, frankfurt am main, 28 june 2021. * * * i am delighted to take part once again in the frankfurt euro finance summit and very pleased to be able to attend in person. today, i will focus on the banking sector and on financial system stability which is a necessary condition for the recovery from the pandemic crisis. banks have weathered the pandemic and the economic outlook is now brightening the euro area economy was struck in 2020 by the extraordinary and severe coronavirus ( covid - 19 ) pandemic shock, with economic activity contracting sharply in the first half of the year. it recovered in the second half, albeit partially and unevenly across countries. overall, gdp fell by 6. 6 % compared with 2019. but the economic outlook is brightening. in our june eurosystem projections, the 2021 and 2022 gdp growth forecasts for the euro area have been upgraded by between 0. 5 and 0. 6 percentage points compared with our march projections. these improved economic prospects reflect the swifter progress of the vaccination campaign in the second quarter of this year, substantial additional fiscal support – partly funded by the next generation eu package – and the more favourable outlook for global demand. euro area real gdp is expected to return to its pre - crisis level by the first quarter of 2022. the outlook for inflation has also been revised up. annual inflation has picked up, mostly on account of temporary factors, including a strong increase in energy prices : it is projected to average at 1. 9 % in 2021 and to peak at 2. 6 % in the fourth quarter of this year, before returning to 1. 5 % in 2022 and 1. 4 % in 2023. we therefore expect inflation in the medium - term to remain below our aim. in any case, we are attentive to incoming information to assess whether the temporary increase in inflation gives rise to second round effects that could translate into a more permanent development. overall, euro area banks have weathered the pandemic crisis. the deep recession certainly weighed on performance throughout last year and macroeconomic conditions remained challenging in the first quarter of 2021 due to the third wave of coronavirus infections. yet extraordinary fiscal and monetary policy measures provided support to the economy over that period, including income support for firms and households, loan guarantees

and statutory payment moratoria, as well as the ecb ’ s expanded set of unconventional monetary policy measures and prudential actions. these measures have been successful in helping the economy to absorb the shock of the coronavirus pandemic and have helped mitigate risks to financial stability. corporate insolvencies have been limited and the rise in unemployment contained. sovereign debt markets have remained stable, and these policy actions have prevented adverse feedback loops between the real economy and the financial system. in stark contrast to the global financial crisis ( gfc ), banks have helped cushion the economic impact of the pandemic rather than exacerbate it. bank capital and liquidity positions were much stronger at the onset of the pandemic than they were in 2008, bolstered by the post - gfc regulatory reforms. moreover, capital relief measures implemented by micro - and macroprudential authorities, coupled with banks retaining profits, generated additional capital space to absorb losses, permitting banks to maintain the flow of credit to the real economy. while bank valuations were hit hard in the initial phase of the crisis, in part from a significant drop in profitability, market sentiment has become more positive since late 2020. bank equity prices rallied on positive news about vaccines and rising reflation expectations, with investors 1 / 4 bis central bankers'speeches anticipating that a steepening of the yield curve could support bank profitability. banks ’ results in the first quarter of 2021 exceeded expectations, analysts have upgraded their profitability projections for 2021 and 2022, and bank equity prices have almost returned to their prepandemic levels. but long - term structural issues persist … nonetheless, despite growing market optimism, euro area banks still face important risks and continue to grapple with the long - run structural challenge to achieve a sustainable improvement in their profitability. the better - than - expected earnings in the first quarter of this year should be put into context. in the first place, a key driver of increasing net profits was a fall in loan loss provisions, in view of the brighter economic outlook. second, better - than - expected earnings are also partly due to strong trading income, which is volatile and depends on market conditions, while net interest income remained under pressure. despite the sharp recession, banks ’ non - performing loans ( npl ) ratio reached its lowest level on record at 2. 6 %, on average, at end - 2020, even if this masks some dispersion among euro area banks. furthermore