March 21, 2019

Andrea Enria, Chair of the ECB Supervisory Board, presented the ECB annual report on supervisory activities for 2018. He presented the annual report to the Economic and Monetary Affairs Committee of the European Parliament. Mr. Enria outlined the supervisory priorities of the Single Supervisory Mechanism (SSM) for 2019 and the ongoing preparations for Brexit. The key topics covered in the annual report include information on implementation of the SSM model of supervision, contribution to the EU crisis management and resolution framework, and organizational setup of ECB banking supervision.

Mr. Enria examined developments in the banking sector and highlighted the increase in common equity tier 1 ratio of euro area banks, along with decrease in the volume of nonperforming loans (NPLs) on balance sheets of the banks under ECB supervision. He also discussed the comprehensive supervisory framework that directly addresses legacy NPLs and aims to prevent the build-up of new NPLs in the future. He also mentioned that the targeted review of internal models, or TRIM, has helped to form a common understanding, across the SSM, of regulatory requirements related to internal models. Furthermore, it has helped to identify the most common shortcomings of internal models used by significant institutions. While discussing the crisis management framework on which ECB Banking Supervision and SRB have cooperate closely, he mentioned that the early intervention framework needs improvements to enable the supervisor to apply these measures properly. The overlap between supervisory and early intervention measures should be removed and the early intervention powers of ECB should be given a legal basis in the form of a regulation, with a view to limiting the legal uncertainty linked to different national implementation laws.

Next, he outlined the supervisory priorities for 2019. First, in the area of credit risk, ECB Banking Supervision will continue to promote the reduction of the stock of NPLs. Furthermore, as part of a new initiative, ECB will assess banks’ credit underwriting criteria with a view to avoid excessive risk-taking by banks. The quality of specific asset class exposures, such as commercial real estate, residential real estate, and leveraged finance, will be closely examined. Second, with regard to risk management, the TRIM review will continue. ECB Banking Supervision will also continue to push for improvements to banks’ internal processes for capital and liquidity adequacy—the ICAAP and ILAAP processes, respectively. The supervisory stress test this year will also assess the resilience of banks to liquidity shocks, while new measures will be taken to examine IT and cyber risks. Finally, supervisory activities planned for 2019 include work related to trading risk and asset valuations as well as the preparations for Brexit.

He mentioned that Brexit has been a supervisory priority for ECB over the past two years. However, considerable uncertainty still exists on the next steps in the negotiation process and it appears that a hard Brexit is still not off the table. As part of the supervisory strategy, ECB is closely working with the UK authorities to agree on a solid post-Brexit cooperation framework. EBA has successfully coordinated the preparation of a template supervisory cooperation MoU for all EU authorities to be used bilaterally with UK authorities. In addition to this MoU that covers aspects, such as information exchange and the reciprocal treatment of cross-border banking groups, ECB Banking Supervision and PRA have also agreed on a split of supervisory responsibilities in relation to branches’ supervision. He finally mentioned that the first five years of European banking supervision have leveled the playing field for banks in the euro area and strengthened the resilience of banking sector. However, additional work still needs to be done.

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Keywords: Europe, EU, Banking, TRIM, Banking Supervision, Brexit, Internal Models, Supervisory Activities, Annual Report, ECB