Pentti Hakkarainen of ECB on Challenges and Future of Banking in EU
Pentti Hakkarainen, Member of the ECB Supervisory Board, spoke at the ESRB Annual Conference in Frankfurt, about the challenges and future of banking in the EU. He discussed the profitability and business model sustainability of euro area banks, along with the legacy issue of nonperforming loans (NPLs), providing thoughts on why and how banks should progress further toward solutions in this area.
He highlighted the high level of NPLs, with the weighted average NPL ratio across significant euro area banks now being below 6%; however, in a few countries this number is above 40% and in too many cases it remains above 10%, thus reflecting that many euro area banks have successfully managed to avoid this problem. “Research, and also our practical experience to date in addressing NPLs during the crisis, indicate that a proactive approach pays off,” he added. Good bank business models must be resilient to macroeconomic shocks. Banks, therefore, require a cautious approach that builds-in the capacity to cope with major macroeconomic downturns. Such prudent management implies limiting risk appetite ex ante. This will involve due consideration of— hedging, risk buffers, capital cushions, and limitations to credit risk in the good times. Where banks have not done this—and where they therefore face big ex post challenges—they should face the consequences of their choices, otherwise long-term incentive problems will arise.
Banks should recognize that they are the primary owners of any asset quality and NPL problems that may have arisen. In particular, banks should not sit on their hands in anticipation of a big public sector solution that will save them from the pain of cleaning up balance sheets on their own. Banks must act swiftly now to take all the relevant steps at their disposal to address this issue. This said, I also acknowledge that in some cases it is understandable and even desirable to use an element of public support within the set of solutions. There are several initiatives to solve the problem with public money and, as time is of the essence, swift solutions like national Asset Management Companies could be well justified. Mr. Hakkarainen concludes that “Primary responsibility for solving such problems should always lie with the banks.”
Related Link: Speech
Keywords: Europe, EU, Banking, NPLs, Asset Management Companies, Credit Risk, ECB
Previous Article
OSFI Publishes Updates on Filing Instructions and Forms Under LICATRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
