ECB Issues Risk Assessment Report and Supervisory Priorities for 2020
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.
Related Links
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Related Articles
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023
ISSB Standards May Become Effective from January 2024
The International Organization of Securities Commissions (IOSCO) welcomed the confirmation statement by the International Sustainability Standards Board (ISSB) setting out its progress in the development of its first sustainability-related corporate disclosure standards.
