Mario Draghi of ECB on Progress with European Banking Supervision

The ECB President highlighted that the European banking supervision has brought about a more uniform approach on bank supervision, leading to a more resilient banking sector. The key catalyst for this change—along with the new EU regulations—has been the harmonization of the Supervisory Review and Evaluation Process (SREP). This harmonization has allowed supervisors to converge toward common benchmarks on risk assessment and has helped them consistently link their risk assessments to supervisory capital add-ons and other measures. The total capital ratio of banks supervised by the ECB has increased by more than 170 basis points since early 2015. The quality of capital has gone up as well: the high-loss absorbing component—that is, common equity tier 1 capital—now makes up the largest share of total capital of euro area banks. He also stated that specific weaknesses are also now being addressed, with non-performing loans (NPLs) being the most important issue. Many banks still lack the ability to absorb large losses, as their ratio of bad loans to capital and provisions remains high. Therefore, a joint effort is needed by banks, supervisors, regulators, and national authorities to address this issue, while creating an environment in which NPLs can be effectively managed and efficiently disposed.

He also discussed about the benefits of strong supervision for monetary policy, "All the supervisory efforts have not only produced a more robust banking sector; they have also provided crucial support for our monetary policy since we entered a new easing phase in mid-2014." Stronger supervision is one of the sources for this support. Stronger supervision has helped to contain financial stability risks that may emerge during a long period of low interest rates. Credit risk exposures in bank loan books have declined as monetary policy has eased. Default rates have fallen and forward-looking measures also suggest a decline in credit risk. As part of its SREP, ECB Banking Supervision performs detailed, comparative assessments of bank business models, which feed into the ongoing supervisory dialog between the supervisory teams and banks. Mr. Draghi concluded, "We are now three years into the life of European banking supervision and the track record so far is encouraging. Though the single supervisor is still a young and developing institution, it has in many ways lived up to the high expectations that accompanied its founding. Rigorous and uniform supervision has led to higher levels of capital and a more resilient sector overall."

Related Link: Speech

Keywords: Europe, EU, Banking, Banking Supervision, SREP, NPL, Financial Stability, ECB