by Should Europeans be worried about the possibility of a repeat of the history of the 2008 financial crisis, this is the question raised by the European Court of Auditors (ECA) when publishing its new report. The EU watchdog is asking for more guarantees from the ECB, which it accuses of lax supervision of Europe’s biggest banking institutions.
Should citizens fear that the history of the 2008 financial crisis will repeat itself?
Given the importance of trust in the banking sector, we looked at how credit risk in major EU banks is controlled.@Mihails_Kozlovs summarizes the main takeaways from today’s report 👇 pic.twitter.com/DF8xttHrwc
— European Court of Auditors (@EUauditors) May 12, 2023
In its report, the European Court of Auditors stresses the importance of credit risk management, “because poor management by banks can compromise their viability and the viability of the entire financial system. However, despite increased efforts to monitor banks’ credit risk and problem lending, the ECB has not imposed commensurately higher capital requirements on riskier banks. It also failed to adequately strengthen supervisory measures when banks showed persistent weaknesses in credit risk management,” the report said.
🏦The European Central Bank (#ECB) must step up its supervisory efforts to ensure EU banks are managing their credit risk properly, especially borrowers who default on their loans, according to our 🆕report.
— European Court of Auditors (@EUauditors) May 12, 2023
EKT: plunge in housing and business loans in the euro zone
What does the report reveal?
The ECB monitors around 110 major banks in 21 EU countries and annually assesses their risks in terms of credit exposure (eg poor credit standards), governance, business model and liquidity. It also assesses the ability of banks to manage these risks. It can impose on banks, as mentioned in the report, additional capital requirements to cover the risks identified and impose corrective measures to reduce these risks. This process aims to ensure that banks comply with EU prudential requirements and that confidence in them is justified. The ECB recently pointed out that the outlook for banks is deteriorating due to the current difficult economic environment, while previous crises have shown that underfunding can threaten their viability.
“To avoid bank failures due to poor credit risk management, the ECB should ensure that banks manage credit risks properly,” said Mihails Kozlovs, the ECA member responsible for the report. “This is vital given the importance of confidence in the banking sector and the current difficult economic conditions.”
In its detailed critique, the European Court of Auditors also accused the ECB of taking too long to decide on capital requirements and of not having enough staff. The timing of the report is no coincidence, as the banking sector on both sides of the Atlantic came under scrutiny following the collapse of US regional banks and the forced bailout of Credit Suisse.
The European watchdog, which has focused on monitoring 10 banks with high levels of bad loans, said ECB officials were too hesitant to use all their powers and were applying them unevenly. “Those with a higher percentage of non-performing loans had more time than others, and banks were able to choose a hedging approach that was more beneficial to them,” the report said.
The ECB’s response
But the ECB, as the Financial Times reports, “responded that the process of dealing with non-performing loans could not be carried out overnight without significant negative consequences for the overall economy.”
She also claimed that she had finally achieved her goal, as toxic debts had been steadily reduced by more than $1 trillion. eight years ago to less than 350 billion euros last year, an amount corresponding to less than 2% of total loans.
The CEC made three main recommendations to the ECB: streamlining its supervisory process, strengthening bank risk assessment and using more effective measures to incentivize banks to better manage risk.
Regarding the determination of capital requirements for banks, the ECB has stated that it will determine them more quickly. He also pledged to address staffing shortages. These shortcomings prevented it from carrying out a quarter of its priority investigations on the banks’ internal risk models and 10% of on-site inspections. For the current year, it has covered certain positions by calling on external consultants. It will consider next year whether “more formal scaling-up processes” are needed for national central banks to provide more staff to joint teams. He admitted there was still a 4% staff shortage at the watchdog, which employs around 1,600 people.
However, the central bank rejected some of the recommendations and said others had already been addressed by 2021 when the group of external auditors reviewed central bank supervision of banks. The ECB assumed responsibility for supervising the major banks in the eurozone after the banking meltdown and sovereign debt crisis that hit the region more than a decade ago. This led to the creation of its Single Supervisory Mechanism in 2014 as a separate entity.
“Our general conclusion is that the ECB [Îχει] is stepping up its efforts to monitor the credit risk of banks, and in particular non-performing loans,” the European Court of Auditors says in its 121-page report. “However, more needs to be done to give the ECB greater assurance that credit risk is being properly managed and hedged.”
