ECB published the annual report that assesses risks in the banking sector. The three most important risk drivers identified for 2019 are geopolitical uncertainties, legacy and potential future non-performing loans (NPLs), and cybercrime and IT disruptions. These are followed by repricing in financial markets, low interest rate environment, and banks’ reaction to regulation.
The results of the risk assessment exercise highlights that the work so far has led to a significant progress in reducing NPLs. The NPL ratio of significant institutions decreased from 8% in 2014 to 4.9% in the fourth quarter of 2017. Nevertheless, the aggregate level of NPLs remains high compared to international standards and further efforts are necessary to ensure that the NPL issue in the euro area is adequately addressed. High stocks of NPLs constrain balance sheets, profitability, and capital of banks. Therefore, addressing legacy NPLs, including the monitoring of banks’ progress to reduce NPLs, remains among the key priorities of the European banking supervision. In addition, the ongoing search for yield might increase the potential for a build-up of future NPLs.
The report also highlights that the risk of an abrupt and significant repricing in financial markets has increased since last year. Banks would be affected mostly through their holdings of instruments recognized at fair value, collateral requirements, and costs to raise capital or liquidity. In an extreme case, if a major repricing coincided with other major events, it could also threaten the solvency of central counterparties, thus posing a systemic risk. As most of the post-crisis financial regulatory initiatives are being finalized, the pace of regulatory reform has somewhat slowed. However, some regulations still need to be implemented into the EU law. While regulatory uncertainty has decreased, banks need to further adapt their business models to operate in the new environment. Tighter regulation helps to safeguard a resilient and stable banking system in the medium and long term. In the short term, however, tighter regulation can challenge the profitability of banks and impose banking-sector risks, such as banks failing to adapt on time or postponing strategic decisions and/or investments
ECB Banking Supervision conducts a risk identification and assessment exercise on an annual basis in close cooperation with national competent authorities. The analysis draws on inputs from a wide range of contributors, including the Joint Supervisory Teams and horizontal micro-prudential and macro-prudential functions. It is also informed by discussions with banks and other relevant authorities. The outcome of this exercise serves as a basis for defining supervisory priorities and determines focus areas for the regular monitoring and analysis of risks to which the supervised banks are exposed.
Related Link: Risk Assessment for 2019 (PDF)
Keywords: Europe, EU, Banking, Securities, NPLs, SSM, Cyber Risk, Climate Related Risks, ECB
Previous ArticleBank of Italy Updates Handbook for AnaCredit Reporting in Italy
EBA published guidelines on loan origination and monitoring, which bring together prudential standards and consumer protection obligations, along with the anti-money laundering and the Environmental, Social, and Governance (ESG) considerations.
EBA published a consultation paper on the draft amended regulatory technical standards on own funds and eligible liabilities.
EBA published a report on convergence of supervisory practices in 2019.
PRA published a set of questions and answers (Q&A) covering common queries regarding residential and commercial property valuations, for the purpose of the Capital Requirements Regulation (CRR), during the period of disruption caused by COVID-19 pandemic.
IOSCO proposed updates to its principles for regulated entities that outsource tasks to service providers.
MAS announced that the first phase of the Veritas initiative will commence with the development of fairness metrics in credit risk scoring and customer marketing.
BoE published the Statistical Notice 2020/4 to update the buy-to-let (BTL) Phase 2 and Phase 3 definitions for the Interest Rate Type data item.
FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic.
PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.
EBA published an opinion following the notification by the French macro-prudential authority, the Haut Conseil de Stabilité Financière (HCSF), of its intention to extend a measure introduced in 2018 on the use of Article 458(9) of the Capital Requirements Regulation (CRR).