Andrea Enria of ECB on Supervisory Priorities for New Legislative Term

Mr. Enria highlighted that next year, as every year, ECB will organize its work around a set of key supervisory priorities. The completion of the post-crisis repair process will continue to rank high on the priority list. ECB will follow up on its guidance on non-performing loans (NPLs) as well as on the recommendations stemming from targeted review of internal models. It will also continue to evaluate the banks’ credit underwriting criteria and the quality of their internal capital and liquidity adequacy assessment processes. Moreover, bank vulnerability to IT and cyber risk will be closely monitored, along with the sustainability of bank business models, specifically with a view to profitability and the ongoing digitalization of financial services. Other key issues for supervisors will be Brexit and the EU-wide stress test. Also, comprehensive assessments will continue to increase in number and relevance as banks relocate business to euro area as a consequence of Brexit and as member states—Bulgaria, followed by Croatia—apply for close cooperation.

ECB Banking Supervision had committed to reconsidering its supervisory expectations on new NPEs, following the finalization of new legislation. ECB has concluded that some adjustments to its supervisory expectations for prudential provisioning for new NPEs are warranted. These adjustments will enhance the consistency and simplicity of the overall approach to NPEs, thus reducing the reporting burden for banks. The scope of the ECB supervisory expectations for new NPEs will be limited to NPEs arising from loans originated before April 26, 2019, which are not subject to the Pillar 1 NPE backstop. NPEs arising from loans originated from April 26, 2019 onward will be subject to the Pillar 1 backstop, with ECB paying close attention to the risks arising from them. Finally, Mr. Enria outlined the following regulatory and supervisory challenges in the new legislative term:

• He discussed the importance of completing work on risk-weighted assets and internal models.
• He acknowledged that the implementation of the Basel II floor was more lenient in EU, which makes the new output floor more costly in EU than in other jurisdictions. Despite the unwarranted impact of output floor on low-risk business, this ensures a more level playing field between banks using internal models and banks relying on standardized approaches. Thus, it is essential to complete this last chapter of the post-crisis reform agenda and to give banks and markets certainty that regulatory requirements have achieved a stable configuration. 
• Beyond the implementation of Basel III, the next review of the Capital Requirements Regulation and Directive (CRR/CRD) should be an opportunity to address the existing shortcomings, specifically those in the form of the existing differences in national legislation; these national difference seriously impair the conduct of supervisory tasks in the Banking Union.
• Competent authorities should be able to require institutions to meet their supervisory Pillar 2 requirements with capital instruments of the highest quality, known as Common Equity Tier (CET) 1.
• Further attention may be needed toward the prudential and supervisory approach to information and communications technology risk management. 
• He stressed the importance of continued efforts to strengthen the institutional architecture of the Banking Union, the third pillar of which, a European deposit insurance scheme, is still missing. 
• Mr. Enria discussed the need for integrating money-laundering risks into the prudential work. ECB works closely with EBA and national prudential and anti-money laundering or counter financing of terrorism (AML/CFT) supervisors on implementing the tasks set out in the AML Action Plan of the European Council. In this context, the Single Supervisory Mechanism (SSM) AML/CFT Coordination Function leads the internal policy work on updating the SSM methodology to consistently take account of AML/CFT concerns in the relevant supervisory activities. He sees a need to further strengthen and harmonize the overall AML framework in EU.

Related Link: Speech

Keywords: Europe, EU, Banking, Basel III, Internal Models, CRR/CRD, Banking Union, Regulatory Capital, Banking Supervision, NPLs, Output Floor, Options and Discretions, ECB