While speaking at the SSM and EBF Boardroom dialog in Frankfurt, Andrea Enria, Chair of the Supervisory Board of ECB, discussed the benefits of integration and Banking Union, the priorities for Single Supervisory Mechanism (SSM), and the ECB approach to supervision of banks.
Andrea Enria mentioned the benefits of integration in EU market and highlighted that banking union was launched to address the adverse feedback loop between banks and their sovereigns and to ensure that banks more effectively meet the needs of corporates and households throughout a crisis. However, despite the progress achieved, the European banking sector is still fragmented, as the restructuring process has taken place mainly along national lines. Mr. Enria pointed out that many of the decisions required to advance the integration of European banking markets lie outside the remit of supervisors. Despite the progress toward a much more harmonized regulatory framework and a single rulebook directly applicable across EU, in certain important areas the progress is falling short of what is needed. If the aim is to have a truly European banking sector, banking groups should be allowed to freely allocate their regulatory capital and their liquidity within the euro area. However, there is still reluctance to remove existing barriers.
Mr. Enria added that important priorities for the Single Supervisory Mechanism, or SSM, have been well-defined and call for continued focus and effort on the part of both supervisors and firms. The cleaning-up of balance sheets must be completed, the issue of high levels of non-performing loans (NPLs) needs to be resolved, the new BCBS framework for market risk might have to be implemented in a period of heightened volatility, and the robustness of internal risk measurement and management must remain a central focus of the supervisory work. The review of internal models—known as the TRIM project—will be completed this year, but the follow-up to its findings, coupled with the implementation of the standards and guidelines developed by EBA, will keep supervisors and banks busy for quite some time. He emphasized that greater consistency and reliability of risk-weighted asset calculations is needed to foster good risk management practices and fully restore the credibility of the regulatory and supervisory framework. He then discussed how Brexit will change the shape of the banking sector. He said: "To me, one thing is clear: post-Brexit, withholding cooperation is no solution. UK and EU supervisors must find ways to work together toward a safe and sound banking sector. And I can reassure you that constructive solutions are being found.”
Next, he discussed the ECB approach to supervision and highlighted that ECB decisions are based on both rules and judgment. He also added that European banking supervisors must be accountable and transparent. Banks, investors, and the public must be able to understand banking supervisors' principles and policies. Only then will they be able to anticipate supervisors’ actions and expectations. Take the supervisory review and evaluation process (SREP), for example. The SREP is ECB’s core tool for assessing the risks of each bank and determining its Pillar 2 requirements. He believes that ECB has made a commendable effort to become more transparent on its SREP methodology. Also, he noteed that practices on the disclosure of Pillar 2 requirements vary widely. In some cases, no information is disclosed, even though it is essential for determining the triggers that may lead to suspending coupons or to converting Additional Tier 1 instruments into equity. Breaching Pillar 2 requirements can also trigger a “failing or likely to fail” assessment, with direct consequences for all categories of investors and possibly even for uninsured depositors. Thus, greater transparency would be warranted.
Related Link: Speech
Keywords: Europe, EU, Banking, Stability and Integration, NPLs, SSM, Banking Union, Banking Supervision, ECB
Previous ArticleSNB Updates Form for Reporting Mortgages to Finance Real Estate
HKMA urged authorized institutions to take early action to adhere to the IBOR Fallbacks Protocol, which ISDA is expected to publish soon.
FSB published a global transition roadmap for London Inter-bank Offered Rate (LIBOR).
HM Treasury published a document that summarizes the responses received from a consultation on the approach of UK to transposition of the revised Bank Resolution and Recovery Directive (BRRD2).
HM Treasury published the government response to the feedback received on the consultation for updating the prudential regime of UK before the end of the Brexit transition period.
PRA published the final policy statement PS22/20, which contains the updated supervisory statement SS12/13 on counterparty credit risk.
FSB published an update on its work to address market fragmentation. FSB is working in this area in collaboration with the other standard-setting bodies.
EBA proposed revisions to the guidelines on major incident reporting under the second Payment Service Directive (PSD2).
EBA published the final draft regulatory technical standards specifying the methodology for prudential treatment of software assets by banks.
FSB published a report presenting the roadmap to enhance cross-border payments by providing a high-level plan that sets ambitious but achievable goals and milestones in the five focus areas.
In a recent communication, EIOPA urged the insurance sector to complete its preparations for the end of the Brexit transition period on December 31, 2020.