The European Central Bank (ECB) must strengthen its supervision of EU banks so that credit risk is “well managed and covered” and thus avoid bankruptcies, the European Court of Auditors requested this Friday.
In a “special report” prepared on the prudential activities of the ECB, which has been in charge of it since 2014, the European auditors ask the monetary entity to “strengthen its supervision of the credit risk of banks in the European Union to ensure that manage it properly, especially when loans are not paid,” according to a statement.
An estimate of the amount of principal to review
The ECB also failed to tighten prudential measures sufficiently when banks allowed weaknesses in their credit risk management to persist, the report said. Banks’ credit risk assessments and control systems are generally “of good quality”, but then the “tools” to “ensure that identified risks are fully covered by additional capital” are missing, according to the document.
In other words, the method of calculating the amount of capital that a bank must have in addition to the regulatory minimum does not guarantee adequate risk coverage, the Court points out.
Likewise, the ECB “must do everything possible to prevent banks from going bankrupt for having mismanaged their credit risk,” said Mihails Kozlovs, member of the Court responsible for the report, in a press release. This is an imperative “given the importance of confidence in the banking sector and the deteriorating economic climate,” he continues.
The ECB defends its methodology
The auditors also point to the lack of staff assigned, both by the ECB and by national authorities, to banking supervision, and regret the excessive length of the 2021 supervisory phases, which may have led to outdated assessments. At the same time, they recognize that the volume of non-performing loans in banks has decreased in recent years under the effect of various factors, including the actions of the ECB.
In a written response, the ECB expresses its disagreement with certain criticisms, considering in particular that “its current methodology for setting additional capital requirements (…) makes it possible to ensure adequate coverage of all significant risks.”
The institution directly supervises 110 of the largest banks in the euro zone under a single supervisory mechanism established in 2014 in response to the 2008 financial and 2011 debt crises.
Source: BFM TV
