Nine eurozone banks took advantage of the European Central Bank’s relaxed rules to fall below its minimum capital requirements last year as part of supervisory efforts to keep credit flowing during the coronavirus crisis.

The number of banks falling below the ECB’s overall capital requirements and guidance increased from six the previous year, the central bank said on Thursday. While the ECB did not name the banks, it warned that the pandemic was still likely to create more problems for lenders.

Andrea Enria, head of supervision at the ECB, said he expected more banks would need to benefit from its exceptional capital relief once the fallout from the pandemic causes an expected increase in bad loans.

“Data for the third quarter of 2020 confirm a concern we already flagged in December,” said Mr Enria as he presented the ECB’s annual assessment of bank capital. “The way in which banks are preparing for asset quality deterioration varies widely and could, in some cases, be insufficient.”

The ECB, which supervises the most important 115 banks in the eurozone, warned that when government support measures, such as loan guarantees and moratoria are phased out, it “may increase the risk of cliff effects”.

Banks entered the pandemic with much higher levels of loss-absorbing equity capital than in the 2008 financial crisis, it said. The average common equity tier one capital ratio — a key benchmark of balance sheet strength — rose from 14.4 per cent at the start of the year to 15.2 per cent among the biggest banks.

As a result of the pandemic, the ECB and national regulators allowed banks to eat into several of the extra capital buffers they had imposed on the sector. However, some banks have been reluctant to do so, worrying about how long the relief will last and the risk of stigma among investors.

“There has been a concern that the buffers were not being used and there was a reluctance to use them,” Mr Enria said. “But once the losses begin to materialise we will have to see if there is still a reluctance and a stigma — I hope there isn’t.”

The ECB also told banks to stop paying dividends last year, estimating this saved them €30bn in capital. But it allowed stronger banks to resume dividends under strict limits this year and Mr Enria estimated they would distribute up to €11bn to shareholders.

Despite the pandemic causing a record postwar recession last year, the ECB said non-performing loans at the largest eurozone banks continued to fall from €506bn to €485bn in the first nine months of 2020.

Mr Enria wrote to the region’s biggest lenders late last year to warn that many of them were failing to do enough to prepare for rising bad loans.

He said more than a fifth of banks have more than 10 per cent of their loans under moratoria or other forbearance measures, adding that this created “a kind of blindness” for lenders that could no longer gauge if these borrowers were likely to default. In Greece, about 15 per cent of all bank loans are subject to moratoria, according to the country’s central bank.

Overall return on equity at the biggest eurozone banks dropped from 5.2 per cent in 2019 to 2.1 per cent by September last year. Impairments and provisions for bad loans knocked 3.5 percentage points off their returns.

The sector’s profitability is expected to rebound “only moderately” this year, the ECB added, urging more cost-cutting, digitisation and consolidation in the sector. More than two-thirds of bank staff were working remotely at the start of the pandemic, falling to just over 40 per cent in September, the ECB said, adding that banks “could consider reviewing their staff and premises policies” to cut costs permanently.

The central bank listed several concerns about banks’ governance, including their “crisis risk management frameworks, risk data aggregation, IT and cyber risks, as well as anti-money laundering risks”.