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ECB Banking Supervision reviews lending to troubled shipping sector

Maritime transport is responsible for the carriage of 90% of world trade, 90% of the EU’s external trade and 40% of intra‐EU trade. While it is often cited as an insider’s speciality, lately it has been hitting the news more frequently as a result of the headwinds faced by the sector in almost all segments.

Since 2008, the industry has weathered heavy waters for longer than initially expected and is still navigating without definite signals of calmer seas. Ongoing uncertainty seems to lie ahead for a sector of importance to many facets of global economic life. While some argue that today’s hurdles stem from overcapacity and structural imbalances that are likely to be remedied with the next turn of the asset cycle, others believe that the industry is faced with a structural transformation caused by technological advances and shifts in trade patterns, meaning that shipping itself will recover but that not all of today’s ships will survive in the market.

Maritime transport has been a cyclical industry throughout its long history. Its unique features (e.g. volatility of demand, delay between ship ordering and delivery), combined with the global character of the business, add to the uncertain nature of the industry and thus entail challenges for shipping firms and their banks. These challenges become very clear when we look at second-hand prices for five-year-old vessels today compared with their peak prices just before the big drop in 2008.

Market estimates put global bank lending to the shipping sector at approximately USD 400 billion, a sizeable portion of which still comes from European banks. This underscores their strong involvement with and, as a consequence, their considerable exposure to a traditionally volatile business. As a result, some shipping portfolios have been causing serious dents in the accounts of some shipping lenders in the form of significant loan loss provisions and high volumes of non-performing loans (NPLs). It goes without saying that these challenges differ amongst banks, depending not only on the size of the relevant exposures but also on their possible shipping segment concentrations or specialisation, as well as on the rigour of the risk management and governance tools that are used to mitigate risks.

In response to these developments, and within its supervisory priorities of focusing on exposure concentrations in specific asset classes that could have a significant capital impact for engaged banks, in 2016 ECB Banking Supervision launched a project targeting the most relevant shipping portfolios of banks in the different euro area countries. This project follows a new approach that combines on and off-site elements in order to better calibrate the supervisory focus.

In a first phase, granular data were collected as a priority from banks in a sequentially growing sample, for different reference dates. Using a newly developed database and modern data-analysis technology, a preliminary transversal comparison of selected portfolios and their respective asset quality was performed. The timely identification of increased risks and defaulted exposures, as well as the valuation of assets, were also a focus of attention in the context of market volatility and uncertainty. In addition to portfolio quality, data analysis also provides clear insights, on a comparative basis, into banks’ portfolio management practices and internal processes and the responsiveness of their IT systems.

While continuing to track portfolio evolution during the next phase, ECB Banking Supervision will follow up on the issues identified by the project in multiple ways, depending on their severity. The topics will initially be forwarded to the Joint Supervisory Teams (JSTs) so that they can engage with their respective banks with regard to remedial actions. Concerns of high importance will lead to in-depth on-site inspections which will be conducted throughout 2017 and into 2018 by dedicated teams of European inspectors from different national supervisory authorities and closely coordinated by the ECB.

Moreover, ECB Banking Supervision expects the results of the exercise to provide valuable feedback to banks on necessary improvements to their methods of monitoring portfolio quality and risk management processes and also to enable the pursuit of a more level playing field in the sector.

In the future, and building on the experience, infrastructure and methodology of the pilot exercise for shipping exposures, ECB Banking Supervision intends to apply the same combined on and off-site approach also to other relevant asset classes.


European Central Bank

Directorate General Communications

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