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Bank of Spain calls for further bold EU response if COVID-19 crisis worsens

MADRID, Oct 29 (Reuters) - European authorities would need to take more bold economic and political measures to help firms and households weather any deterioration in the COVID-19 crisis, the Bank of Spain said, warning of risks to the stability of the banking sector.

In a financial stability report, the central bank also said that against the backdrop of “new coronavirus outbreaks and in a situation of partial, uneven and uncertain economic recovery” it would be crucial to maintain stimulus measures for the duration of the crisis.

With the pandemic-induced crisis battering much of the euro zone’s economy, firms rushed to tap bank credit to stay liquid as government guarantee schemes provided vital support for banks to keep cash flowing.

In Spain, the government expects to approve in the coming weeks a potential extension and modification of state-backed credit lines that provide companies with much-needed help to survive the coronavirus pandemic.

The central bank said that provisions already booked by Spanish lenders pointed to an increase in the volume of bad loans, although state-backed credits were keeping banks’ bad loan ratios in overall credit portfolios in check.

Still, the crisis could trigger an additional buildup of bad loans in coming quarters, making it more difficult for banks to sell problematic assets, it said.

Following an internally conducted stress-test exercise, the financial authority said that lenders had generally shown a strong loss-absorption capacity in a central scenario, although capital consumption had been higher than in other exercises.

Also, Spanish banks’ geographic diversification could prove less useful than in previous crises, it said, adding that banking sector consolidation could help improve profitability as long as such moves make for more revenue and reduce costs. (Reporting by Jesús Aguado and Emma Pinedo, editing by Andrei Khalip and Hugh Lawson)