IMF Issues Reports on Financial Sector Surveillance of the Euro Area
IMF issued reports presenting findings from the surveillance of financial sector policies in the Euro area. The published documents include the staff report and the selected issues report under the 2018 Article IV consultation, the financial system stability assessment (FSSA) report, and several technical notes under the Financial Sector Assessment Program (FSAP). The technical notes are on detailed assessment of observance (DAO) of Basel Core Principles for Effective Banking Supervision (BCPs); stress testing the banking sector; bank resolution and crisis management; systemic liquidity management; systemic risk analysis; insurance, investment firm, and macro-prudential oversight; and supervision and oversight of central counterparties (CCPs) and central securities depositories (CSDs).
The FSSA reveals that the resilience of large euro area banks has improved, but important vulnerabilities remain. Capital buffers are, in aggregate, sizable relative to the immediate threats, but some banks are especially vulnerable to credit risk and others to market risks. The banking system has ample liquidity, against a backdrop of ECB support. Risks to financial stability relate mainly to tighter financial conditions, weaker growth, and policy and geopolitical uncertainties. The withdrawal of the United Kingdom from the EU (Brexit) could potentially disrupt financial market and services and thus the wider economy. Also, policy reversals could hurt debt sustainability and test the cohesion of policy making in EU. Overall, banking supervision in the euro area has improved significantly following the creation of the Single Supervisory Mechanism (SSM). A detailed assessment against BCPs finds that SSM has established its operational independence and effectiveness, intensifying supervision while harmonizing at a high level. SSM has also implemented sophisticated risk analysis in the process of setting capital targets for individual institutions.
Nonetheless, banking supervision continues to face important challenges, mostly related to resources, liquidity risk, credit risk, and the fragmentation of national laws. Supervision would be more effective in case of more assured continuity in the assignment of suitable resources provided by national competent authorities. Gauging in real time the evolving capacity of a weak bank to cope with potential liquidity strains is essential. Addressing the persistence of nonperforming loans (NPLs) in some member countries must remain a supervisory priority. Beyond that, common definitions of NPL, minimum standards for insolvency and creditor rights, and rules for valuation of collateral would accelerate resolution of NPLs. Gaps and fragmentation in areas such as fit and proper criteria, major acquisitions, related party transactions, country risk, and sanctions need to be addressed while minimizing divergence at the national level. Divergences from international standards should also be eliminated. In addition, further efforts are needed to ensure effective coordination of prudential supervision with the oversight of anti-money laundering structures.
The assessment highlights that financial oversight of the nonbank financial sector is likewise being strengthened. More centralized oversight of financial market infrastructure by ESMA and ECB is warranted, given the systemic nature of the entities involved. Macro-prudential policy will have to become more adept at addressing risks related to cross-border flows and nonbank sources of financing as the financial system evolves. Bank crisis preparedness and management have been substantially upgraded, but here too the regime remains fragmented. The adoption of the Bank Recovery and Resolution Directive (BRRD) and Single Resolution Mechanism Regulation (SRMR), along with the creation of the SSM and the Single Resolution Mechanism, provide a foundation for dealing with problem banks. The bank crisis preparedness and management framework faces significant transitional and structural challenges. A critical transitional challenge is the buildup of bail-in-able financing (known as MREL), which should be expedited, prioritizing large banks. Effective resolution will depend in part on the ready availability of adequate financial resources; thus, it is essential to make fully operational the Single Resolution Fund, to designate the European Stability Mechanism as its backstop, and establish a European Deposit Insurance Scheme (EDIS).
Related Links
- Euro Area: Time to Tackle The Tough Challenges
- FSSA Report
- Staff Report
- Selected Issues Report
- Note on DAO of BCPs
- Note on Stress Testing
- Note on Bank Resolution
- Note on Systemic Liquidity Management
- Note on Systemic Risk Analysis
- Note on Macro-Prudential Oversight
- Note on Supervision of CCPs and CSDs
Keywords: Europe, EU, Banking, Insurance, Securities, PMI, FSSA, Article IV, Technical Notes, FSAP, IMF
Related 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.