The European Central Bank (ECB) Banking Supervision published a report on supervisory activities for 2021, a letter on supervisory expectations regarding the leveraged transactions of significant institutions, and a letter that clarifies differences in lending rates across member states.
The annual report presents the work of ECB Banking Supervision in the year under review as well as its supervisory priorities for 2022-24. During this period, ECB aims to ensure that banks emerge healthily from the pandemic, seize the opportunity to address structural weaknesses via effective digitalization strategies and enhanced governance, and tackle emerging risks, including climate-related and environmental risks and information technology and cyber risks. For each priority, the ECB Banking Supervision developed a set of strategic objectives and underlying work programs, spanning the period 2022-24. The key planned supervisory activities of the ECB Banking Supervision are as follows:
- Regularly monitor bank exposures toward vulnerable sectors, along with the targeted reviews of bank exposures to commercial real estate
- Strengthen efforts to ensure that banks’ risk management practices are adequate, to prevent the build-up of unmitigated risks in the area of leveraged finance
- Increase supervisory attention on risks posed by the excessive search for yield through regular Joint Supervisory Team engagement, targeted reviews, and on-site inspections
- Intensify efforts to assess banks’ digitalization strategies
- Carry out targeted initiatives to ensure that banks effectively address the identified deficiencies in the functioning and composition of their management bodies, with a focus on their collective suitability and diversity
- Conduct a thematic review, in the first half of 2022, to assess banks’ progress toward incorporating climate and environmental risks into their business strategies and their governance and risk management frameworks.
- Conduct a climate risk stress test
- Carry out targeted reviews and on-site inspections
The annual report also highlights that, in 2021, the ECB Banking Supervision investigated climate and environmental risk disclosures of institutions. findings from this investigation will be published in a report and individual feedback has been already provided to each bank. In the letter on leveraged transactions, the ECB Banking Supervision specifies its expectations regarding the leveraged transactions of significant institutions, particularly regarding the establishment of risk appetite frameworks for leveraged transactions, in accordance with the good risk management practices set out in the ECB guidance on leveraged transactions. Finally, the letter on differences in lending rates across member states highlights that prudential requirements and differences in risk-weighted asset (RWA) densities are only one element to consider in explaining differences in mortgage loan interest rates. The prudential framework has been calibrated in such a way that higher risks are reflected in higher RWA densities, which in turn implies that higher capital requirements can be appropriate. in this respect, it is key that internal models appropriately measure risks. The letter further highlights that there are several measures in the Capital Requirements Regulation/Directive (CRR-CRD) review that will reduce unwarranted variability of RWAs across institutions.
Keywords: Europe, EU, Banking, Climate Change Risk, ESG, Stress Testing, Basel, Regulatory Capital, Banking Supervision, Lending, Supervisory Priorities, Leveraged Transactions, ECB, Subheadline
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