The European Court of Auditors (ECA) urged this Friday the European Central Bank (ECB) to “redouble efforts” to supervise the management of credit risks, specifically that of non-payment of loans, warning of the increase in delinquency.
“The general conclusion of the Court is that the ECB has intensified its efforts in the supervision of the credit risk of banks and, in particular, of doubtful loans [NPL]but more is needed for the ECB to better ensure that credit risk is properly managed and hedged,” argues the European Court of Auditors in a report released today.
Urging the central bank of the single currency to “redouble its supervisory efforts to ensure that EU banks manage their credit risk well, in particular the risk of loan default”, the European auditor stresses that “this aspect is important, since the deficient control of credit risk and the lack of coverage by banks can undermine their viability, as well as that of the financial system”.
In the report on the supervision of the credit risk of banks by the EU, the TCE points out that the non-performing loan ratio registered, last year, “a sharp drop compared to 2015” due to the improvement in economic circumstances, the end of public lending support measures and also through sales and securitizations (ie transfers to new owners) of old NPLs.
However, “new delinquencies may arise as the support measures related to covid-19 end and high inflation is added to the economic challenges derived from the war in Ukraine,” the community auditor stressed in the document.
Recently, the ECB “warned of the increase in credit risk, noting that the fall in bank shares points to a deterioration in their prospects,” the TCE also recalls.
The ECB supervises around 110 large banks in 21 EU countries (in the 20 euro countries and in Bulgaria, a candidate country for the single currency) and each year assesses the risks to which banks are exposed in terms of credit, governance, business model and liquidity, also analyzing the capacity of banking entities to manage these risks.
The central bank can require banks to hold more funds to cover risks and can impose corrective measures to reduce risks.
However, as far as bad loans are concerned, the court finds that the ECB “did not make systematic use of its supervisory powers”.
The ECA concludes that, “in relation to the highest risk banks, the ECB systematically chose to require as little as possible” and, as a general rule, “did not apply more demanding control measures when credit risk was high and constant”. which generated “control deficiencies”.
Under the Single Supervisory Mechanism, created in response to the previous financial crisis of 2008, the ECB directly supervises the largest banks in the EU, which own about 82% of the assets in the Banking Union.
In 2021, administrative expenses related to the ECB’s supervisory functions amounted to €577.5 million and, in the same year, the central bank identified a sample of 10 banks with high levels of delinquency.
Source: TSF
