Danièle Nouy of ECB Speaks on the Work of ECB Banking Supervision

With respect to TRIM, Ms. Nouy mentioned that, with about 200 on-site investigations planned for 2017-19, the project aims to assess the adequacy and appropriateness of banks’ Pillar 1 internal models and reduce unwarranted variability of risk-weighted assets across banks. She also summarized the key achievements of TRIM. First, the project promoted a common understanding, among banks, of the applicable regulatory requirements for internal models and of the common set of supervisory expectations across the euro area. Second, the review enabled entities to conduct horizontal analyses and peer comparisons to detect recurring shortcomings vis-à-vis regulatory requirements. Finally, on the basis of the TRIM findings, ECB has started to take institution-specific supervisory decisions, ensuring that banks correctly and consistently implement regulatory requirements for internal models. She then discussed the work on the 2018 EBA stress test, emphasizing that the stress test is not a pass or fail exercise. Its results, along with the other relevant supervisory information, are used to form an overall supervisory assessment of banks’ situation. For the 33 euro area banks included in the EBA sample, the results will be published on November 02, 2018. 

She said that, although banks are improving their defenses and reacting to emerging threats, both banks and supervisors should realize that they are never done addressing cyber risk. With respect to Brexit preparations, she added that banks that have not submitted licensing applications before the end of the second quarter of 2018 may not be licensed in time for Brexit. Additionally, ECB will continue work on the assessment of banks’ plans and will closely monitor their implementation to counter the setting up of empty shell entities, without adequate local capabilities to run their business. Next, she discussed key legislative files for the Banking Union, highlighting that she looks forward to the adoption of reports on the Capital Requirements Regulation and Directive (CRD/CRR), Bank Recovery and Resolution Directive (BRRD), and Single Resolution Mechanism Regulation (SRMR) review. She noted that, for the CRR/CRD revision, certain proposals under consideration contain deviations from the Basel standards—for example, the proposed changes to the Basel methodologies for calculating leverage ratio and net stable funding ratio. These deviations should be limited to ensure regulatory alignment and a global level playing field, said Ms. Nuoy. 

She welcomed further reflection on some aspects of the review of minimum requirement for own funds and eligible liabilities (MREL) in the course of the trialogue. One such aspect is the possibility of allowing internal MREL to be waived for subsidiaries in the Banking Union, as there is a single supervisor and a single resolution authority. Also, Ms. Nuoy strongly supported the EC proposal to ensure that systemic investment firms posing increased financial stability risks, as well as an increased risk of spillover effects on other credit institutions, are to be subject to the same regulation and supervision as credit institutions. This approach is similar to that in the United Kingdom and in the United States; it prevents supervisory fragmentation and allows supervisors to draw on significant synergies from supervising certain cross-border activities across the financial sectors. Before concluding, she highlighted that over 60% of the NPL reduction over the past four years was achieved in 2017. The final NPL addendum and the NPL guidance were well-received by stakeholders, including the industry, and they complement the legislative proposal of EC on the introduction of statutory prudential backstops to tackle potential under-provisioning for new loans that turn non-performing. ECB is still developing its policy on how to address the stock of NPLs and more will be known about it later this year.

Related Link: Speech

Keywords: Europe, EU, Banking, TRIM, Stress Testing, Brexit, NPLs, MREL, CRR/CRD, Basel, EC, ECB