“To avoid bank failures due to poor credit risk management, the ECB should ensure that banks manage credit risks soundly”, said Mihails Kozlovs, the ECA member in charge of the report. “This is crucial given the importance of trust in the banking sector and the challenging current economic conditions.”
According to the auditors, the ECB’s assessments of the banks’ credit risks and controls were generally of good quality, despite some shortcomings. However, the ECB does not use its tools and supervisory powers efficiently to ensure that identified risks are fully covered by additional capital, or to instruct banks to better manage this risk. The changed approach applied by the ECB in 2021 for determining the amount of capital a bank must hold beyond the regulatory minimum does not guarantee that various risks are appropriately covered, and the ECB has not applied it consistently. In particular, the ECB did not impose proportionally higher requirements when banks faced higher risks, meaning that risks are not clearly linked to the requirement imposed. In fact, for the highest-risk banks, it consistently selected requirements at the bottom of the pre-defined ranges. Furthermore, the auditors saw a pattern of the ECB failing to sufficiently escalate supervisory measures when credit risk was high and sustained, and control weaknesses persisted.
The auditors criticise the lack of staff – both from the ECB and national supervisors – working on bank supervision and the length of the 2021 supervisory cycle, which could result in outdated assessments. On the other hand, the auditors acknowledge that since 2015 there has been a decline of legacy non-performing loans (those from before April 2018) which was due to a number of factors, including the ECB’s actions. However, the ECB did not systematically use its supervisory powers where banks did not have sound processes and data for identifying and measuring non-performing loans.
Background
Under the Single Supervisory Mechanism, which was set up in 2014 in response to the 2008 financial crises, the ECB directly supervises the EU’s significant banks. There are 110 such banks in the 20 EU countries using the euro and Bulgaria; they hold almost 82 % of banking assets in the Banking Union. In 2021, administrative expenditure on the ECB’s supervisory tasks was €577.5 million. The auditors focused on the 2021 supervisory cycle, including a sample of 10 banks with high levels of non-performing loans.ECA special report 12/2023 “EU supervision of banks’ credit risk: the ECB stepped up its efforts but more is needed to increase assurance that credit risk is properly managed and covered” is available on the ECA website eca.europa.eu. This report complements ECA reports on the ECB’s supervisory activities issued in 2016 and 2018.
