16 January 2024

SSM's af Jochnik/Quagliariello: Priorities to help banks withstand headwinds

In this blog post, we would like to stress the importance of these priorities, as they clearly reflect the existing and emerging risks supervised banks are facing. Having derived these priorities from our risk

We recently published our supervisory priorities for 2024 to 2026, which we based on our outlook for the banking sector and on the findings of our annual assessment of banks, the Supervisory Review and Evaluation Process (SREP). In this blog post, we would like to stress the importance of these priorities, as they clearly reflect the existing and emerging risks supervised banks are facing. Having derived these priorities from our risk assessment, we then have to ensure that action is taken to contain and manage the risks identified. By clearly outlining our medium-term priorities every year, we provide not only strategic direction for our own supervisors, but also clarity to banks about what we will be focusing on and what we expect them to do.

In recent assessments, we welcomed the resilience shown by the banking sector in weathering several crises in the last few years. This resilience was supported by comfortable liquidity buffers, low levels of non-performing loans (NPLs) and improving profitability. At the same time, we advised banks to remain vigilant, as the headwinds of past years have not yet subsided: the economic outlook is still weak, geopolitical tensions are still high and financial stability remains vulnerable.

Although asset quality has remained strong so far and the aggregate NPL ratio is at record-low levels, we expect some deterioration in banks’ asset quality due to weaker growth, sustained inflation and higher borrowing costs. This is weighing on households and firms and some early signs of stress are already visible. Early arrears, which give an indication of loans that are likely to default, increased significantly over the past year, although they remained below pre-pandemic levels. We are seeing growing pressure on households’ capacity to service debt, particularly in the consumer loan segment. Loans for house purchases have slowed, while house prices have started to fall. Rising borrowing costs are weighing on the corporate sector’s refinancing capacity, and bank exposures to commercial real estate are particularly vulnerable given that the sector remains in a downturn amplified by structural shifts, economic uncertainty and higher interest rates. ...

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