The European Central Bank (ECB) Banking Supervision published a letter that explains the approach to the supervision of subsidiaries and branches of Russian credit institutions following the Russian invasion of Ukraine.
In the letter, ECB Banking Supervision highlighted the appropriate measures taken against the subsidiaries of Russian banks in Europe affected by sanctions. ECB specifies that it is working closely with national supervisors to carry out its oversight responsibilities for less significant institutions to ensure that joint supervisory standards are applied consistently across the system. In addition, ECB is monitoring the overall risk assessment and prudential implications of the sanctions very carefully. ECB will check whether the banks in question have implemented adequate internal governance arrangements and controls to adhere to the sanctions, including an effective oversight by their management as well as strong internal control functions and processes to mitigate legal, reputational and organizational risks.
Furthermore, the ECB analysis of the euro area banking sector shows that the direct exposure of euro area banks to Russia is contained overall while the financial stability impacts should be manageable in the first instance. Exposures appear to be concentrated in a few banks. For the nine most exposed banks, an exit from the Russian market that assumes the full write-off of direct cross-border exposures to Russian counterparts and the full loss of the equity held in subsidiaries located in Russia would entail an average comment equity tier 1 (CET1) capital depletion of between 70 basis points and 95 basis points. ECB states that no individual bank would suffer a CET1 capital depletion of more than 200 basis points; given the current solid capital and liquidity position, all banks involved would maintain sufficient headroom over the minimum and buffer requirements. ECB also highlighted that the credit exposure of some euro area banks to the commodity sector deserves close monitoring, since roughly one-third of the current volume of outstanding loans to commodity trading firms, at the global level, stems from euro area lenders.
Related Link: Letter on Supervision of Russian Subsidiaries (PDF)
Keywords: Europe, EU, Banking, Banking Supervision, CET 1, Basel, Regulatory Capital, Cross-Border Exposures, Credit Exposures, ECB
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