The ECB, acting as the single supervisor within the banking union, has stepped up its efforts to supervise credit risk, in particular non-performing loans (NPLs) issued before 2018, but it needs to “better ensure sound coverage and management of risks by banks”, the European Court of Auditors said in a report published on Friday 12 May.
Having analysed a sample of 10 banks with high exposure to NPLs in the 2021 banking supervision cycle, the Court of Auditors notes, for example, that the ECB imposed few additional capital requirements under pillar 2 of the prudential banking framework.
In total, these additional requirements varied “in a range between 0.01 and 0.30%, which is a very small part of banks’ overall capital requirements”, Mihails Kozlovs, the member of the Court of Auditors responsible for the report, noted to journalists on Thursday 11 May. And with an average rate of 2.24%, these requirements were very modest compared to the normal additional pillar 2 requirements.
Furthermore, the auditors note “unequal treatment” in that the single banking supervisor did not impose proportionately higher capital requirements on banks with higher credit risk exposure. In addition, banks with a higher NPL ratio were given more time than others to reduce their stock of impaired bank loans and could choose the most advantageous approach to capital coverage.
In view of this, the Court of Auditors recommends that the ECB modify its methodology for the calculation of additional regulatory pillar 2 capital requirements so as to identify all relevant individual credit risks and ensure that all of them are adequately provisioned. This methodology should also be made public.
The European auditors also recommend that the ECB reduce to “10 months” the time taken to issue its final decisions in a banking supervision cycle. Better aligning the allocation of its banking supervision staff with identified needs could help meet this objective, they also argue.
In its response to the European auditors’ report, the ECB expresses the view that its banking supervision policy and methodology are adequate. The fact that the level of NPL lending has steadily decreased since 2015 is given as evidence. It assures that it is taking action to reduce its supervision cycle times.
See the European Court of Auditors’ report: https://aeur.eu/f/6v2 (Original version in French by Mathieu Bion)