Danièle Nouy, Chair of the ECB Supervisory Board, spoke in Frankfurt about the progress of the European banking supervision over the past three years, along with the path forward. She also stressed on finding a sustainable solution for NPL resolution.
Ms. Nouy highlighted that the European banking supervision has replaced 19 different national supervisory regimes with a single European one and has come much closer to achieving its goals. For instance, since 2014, the correlation between Supervisory Review and Evaluation Process (SREP) scores and supervisory capital requirements has almost tripled—from 26% to 76%. According to Ms. Nouy, “Europe is overbanked” and “the European banking sector needs to consolidate.” In the context of overbanking, she highlighted the positive aspects of the Single Resolution Mechanism (SRM) for banks in Europe, as SRM allows banks to fail in an orderly manner without unleashing a systemic crisis. Mergers and acquisitions are another option to ease the problem of overbanking, according to her. She highlighted that Banking Union has made the cross-border mergers more attractive. “So, it is fair to say that the door has been opened to consolidation.”
She also talked about the issue of high nonperforming loans (NPLs), on which some progress has been made. Earlier this year, ECB Banking Supervision published qualitative guidance to banks on how to deal with NPLs. “With reference to that guidance, we have now scrutinized the plans devised by the banks. And we have started to provide feedback. The situation is very diverse, so we need to assess it on a case-by-case basis and find the appropriate solution for each bank.” A sustainable solution must also ensure that the problem does not reappear. To that end, ECB has published for consultation an addendum to its guidance, setting out expectations from banks in terms of making provisions for future NPLs. The ECB guidance on NPLs provides the basis for a structured dialog with each individual bank. However, the NPL issue needs to be addressed at other levels as well. For instance, “huge differences” exist between euro area countries when it comes to resolving NPLs in court. In some countries, such procedures take considerably longer than in others. National governments must address this by streamlining judicial systems and speeding up court procedures. In a Banking Union, there should be no significant differences in the time it takes to resolve NPLs in court. Out-of-court settlements should also become an instrument in resolving NPLs, added Ms. Nouy. She concludes that it ”requires a joint effort by banks, supervisors, regulators, and politicians to resolve the problem of non-performing loans [NPLs].”
Related Link: Speech
Keywords: Europe, EU, Banking, SREP, SRM, NPLs, EBA
Financial economist; recognized expert on credit risk and default research, credit ratings, modeling, analytics and stress-testing; specializes in Asia-Pacific economic, regulatory, and credit risk trends/analysis
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