ECB published the risk assessment report and the supervisory priorities for 2020. The supervisory priorities build on an assessment of the key challenges facing supervised banks in the current economic, regulatory, and supervisory environment. The risk assessment report specifies that the three most prominent risk drivers expected to affect the euro area banking system over the next three years are economic, political, and debt sustainability challenges in the euro area; business model sustainability; and cyber crime and IT deficiencies.
These risk drivers are followed by execution risk attached to bank strategies on non-performing loans or NPLs, easing of lending standards, repricing in financial markets, Brexit, global outlook and geopolitical uncertainties, reaction to regulation, and climate change-related risks. The risk assessment report highlights that despite a significant improvement in asset quality in recent years, high levels of nonperforming loans remain to be a concern for a large number of euro area banks. Uncertainty stemming from the potential new regulation has decreased, but banks still need to adapt to operate in the new regulatory environment. Additionally, full implementation of the Basel framework as part of the Capital Requirements Regulation/Directive (CRR III/CRD VI) package will lead to an increase in minimum capital requirements and, as a result, an aggregated capital shortfall across EU banks.
To ensure that banks address these key challenges effectively, ECB Banking Supervision has reviewed its supervisory priorities. The key supervisory priorities of the ECB Banking Supervision include the following:
- Continued efforts to address the stock of non-performing loans, prevent the future build-up of new non-performing loans, and engage with impacted institutions to follow up on bank-specific supervisory expectations within a harmonized framework.
- Work on ensuring the adequacy of internal models used by banks in calculating their regulatory capital requirements.
- Work toward improving banks’ internal capital and liquidity adequacy assessment processes (ICAAPs and ILAAPs) by promoting a common understanding of the ECB expectations for banks. Moreover, ICAAPs of banks will be the focus of dedicated on-site inspections. Work will also proceed on improving transparency around the risk drivers of the Pillar 2 capital requirements.
- Continued assessment of the information technology and cyber risks facing banks by carrying out on-site inspections and monitoring these risks as part of the Supervisory Review and Evaluation Process or SREP.
- Conduct, in 2020, the next supervisory stress tests for significant banks.
- Focus on bank adherence to governance expectations in the context of each of the above activities aimed at strengthening future resilience.
- Monitor, along with the national supervisors, the implementation of banks’ Brexit plans and their adherence to supervisory expectations. This includes banks’ progress toward their target operating models in the euro area, within the agreed timelines.
Keywords: Europe, EU, Banking, Securities, Cyber Risk, Brexit, Credit Risk, Basel III, CRR/CRD, Internal Model, Climate Change Risks, SREP, Pillar 2, Stress Testing, ECB
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