(Finance) – The European Central Bank (ECB) needs to strengthen the supervisory effort to ensure that EU banks ensure adequate credit risk management, in particular when borrowers default on their loans. The affirms it European Court of Auditors in a new report on the Frankfurt institution, emphasizing “how important this is, since unsatisfactory management from this point of view can jeopardize the stability of the banks themselves and of the entire financial system”.
Despite increased efforts in supervising credit risk and non-performing bank loans, the ECB “however did not impose capital requirements on institutions that were directly proportional to the risk to which they were exposed, nor did it sufficiently tighten supervisory measures if banks presented persistent deficiencies in credit risk management”. The ECB supervises 110 major banks of the EU, which hold more than 80% of the Banking Union’s assets.
“The ECB should prevent bad credit risk managementbecause this can lead banks to bankruptcy – said Mihails Kozlovs, the ECA Member responsible for the report – This is essential given the importance of trust in the banking sector, especially in today’s complex economic situation “.
“Although it would have been possible to use the existing tools and supervisory powers at its disposal in a different way, the The ECB is of the opinion that the chosen approach is the most efficient and effective“, instead affirms the institution led by Christine Lagarde, according to what can be read in the documentation that the Community Court of Auditors has attached to the opinion published today.
According to EU auditors, the ECB’s assessments of banks’ credit risks and controls were generally of good quality, despite some shortcomings. The ECB, however, does not make use of the tools and supervisory powers at its disposal to ensure that the risks encountered are fully covered by additional capital or to advise banks on how to better manage them.
The new approach adopted by the ECB in 2021 to establish the amount of capital that a bank must hold in addition to the mandatory minimum “does not guarantee the adequate coverage of the various risks”; moreover, the ECB did not “apply it in a uniform way”, argues the European Court of Auditors. In particular, when banks were exposed to higher risks, the ECB has not imposed proportionately higher requirements: this means that there is no clear link between the risks and the requirements imposed.
The auditors of the Court criticize the shortage of bank supervisory staff (whether hired by the ECB or designated by national supervisory authorities) and the length of the 2021 supervisory cycle, which could give rise to dated assessments. On the other hand, we acknowledge that past NPLs (i.e. dating back to before April 2018) have been declining since 2015 and that this trend is attributable to several factors, including the actions of the ECB. The latter, however, “did not make systematic use of its supervisory powers when banks were not equipped with robust processes and data to identify and measure non-performing loans,” it underlines.
Instead, the ECB believes that its approach to NPLs (which consists both in requiring banks with high levels of NPLs to implement specific strategies for their reduction and in applying coverage expectations to all institutions) constituted “a effective response to wait-and-see tactics seen in the past“.