By Jan Strupczewski and John O'Donnell
BRUSSELS/FRANKFURT (Reuters) - Euro zone lenders could take a sizeable hit from the coronavirus outbreak as an economic slowdown puts strain on borrowers, European officials have told the bloc's governments in a recent report.
The memos and analysis give one of the first comprehensive, pan-European assessments of lenders in the region, as countries including Germany and Italy consider what could be done to help banks in difficulty.
European banks, at the centre of the economic crash a decade ago, have since struggled to rebound and now face an economic dip that could hobble them as well as, in turn, government efforts to kick-start lending.
In the frank assessment circulated in April, officials at the European Commission conclude there is "a risk to the financial stability of the euro area". "Averting severe and lasting damage ... may require additional and substantial efforts," they wrote.
In the document, they highlight the impact on banks of unpaid loans and higher financing costs amid market ructions and credit-rating downgrades, concluding that although now stronger than in the past, banks remained vulnerable.
In a letter sent to the European Commission in response to its assessment on April 24, the European Central Bank said all big banks in the currency bloc were solvent but included a list showing that some countries were better cushioned than others.
That data showed that Spain's banks had the slimmest capital reserves in the currency bloc to weather any economic slump, worse even than Italy. The Netherlands and Belgium were far stronger, at the top of the table.
Earlier this month, Bank of Spain governor Pablo Hernandez de Cos said the virus lockdown was having a "very harsh impact" on the economy and creating risks for banks.
The bleak assessment lays bare the vulnerability of the sector to unpaid loans or investment losses due to the virus, as some governments consider how to reinforce banks.
"Ultimately, the corona shock will affect banks as well. The banks have a much higher resilience now than in the past but that will not stop them being impacted," said Lars Feld, the chairman of the German government's council of economic experts.
The council, which advises the chancellery, finance ministry and economy ministry on policy, warned the government in an 101-page report in late March that an economic slump could spill over to banks.
In a recent proposal by France about a recovery fund to bolster the region's economy, officials also propose it could be used to co-finance a "TARP-like programme to buy-back risky assets from affected banks" in countries.
Under the U.S. government's Troubled Asset Relief Program during the financial crisis of 2008 (TARP), the American government injected nearly $250 billion into its banks, a move many say helped them rebound to overtake European peers.
Some German officials have considered the idea of a forced recapitalisation, sources have told Reuters. The country's finance ministry has said such plans were not currently under consideration.