|
|
From supervisors’ point of view, where do European banks stand?
There has been a huge development in regulation and supervision over the past ten years, which has helped build a more robust banking sector. Even though we have been through various crises, the banks are still in a solid position. Capital and liquidity are at comfortable levels and non-performing loans remain low. There are risks, of course, but at the moment we have a robust banking sector in Europe.
What are those risks?
In December we published our supervisory priorities for the coming years so that banks understand what we want them to focus on. The first step is to ensure that they are on their toes so that they can identify new risks. In the current economic context, we are asking them in to monitor credit risk in particular. Interest rates are high, and we are seeing a slight increase in non-performing loans, especially in consumer finance and commercial real estate portfolios. Second, we are also asking them to make more of an effort in terms of governance and risk management: decision-makers need to understand what the risks are and manage them properly. As part of our annual evaluation process, we examined governance. Many banks scored relatively low on this, so we have made it a priority. Third, there’s the digital transformation. It’s essential for banks to leverage new technologies, but they must also ensure they are operationally resilient. Lastly, we are asking banks to monitor and manage climate risk appropriately.
The ECB already announced that it could sanction banks that do not adequately measure climate risks. In general, are banks meeting supervisors’ expectations?
In 2020 we issued our expectations in this area, and two and a half years ago we set deadlines for banks to meet them. We expect all banks to be aligned with our expectations by the end of this year, and we have given them some interim milestones they need to reach in the meantime. We also announced that if they fail to comply, we will take more stringent measures if necessary to enforce our expectations. We could, for example, use our escalation ladder to implement different measures, such as requiring banks to increase capital in certain areas or imposing fines until they meet the requirements.
Have any of the banks been fined already?
We have notified a few banks that, based on our current assessment, they have not met the interim milestones, which means they face the prospect of having to pay a so-called pecuniary penalty. Supervisors will need to assess the documents that banks submit and the total number of days that they might have failed to comply past the deadlines we gave them. This will form the basis for any potential penalty, which would need to be decided upon by the Supervisory Board. So it’s a process that is not over yet.
Regarding the new risks you mentioned, there is much debate surrounding the use of artificial intelligence (AI). What risks does this technology pose to banking?
AI is in its early days, so it will develop more, but it’s certainly already here. Of course, it is something we need to follow closely. Last year we conducted a survey which found that, among the banks we supervise, 60% are already using AI in some shape or form. For us, it’s important to ensure they are using it wisely and prudently. We need to make sure banks are managing it in such a way that, if the technology fails, they have an alternative means of serving their customers.
You said earlier that European banks are robust. In recent years banks have taken advantage of good results to distribute dividends and launch share buy-back programmes. Are you concerned that they might be allocating too many resources to remunerate shareholders and not enough to increase solvency levels?...
more at SSM