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Exchange of views with the European Affairs Committee and Finance Committee of the French Senate

Introductory statement by Andrea Enria, Chair of the Supervisory Board of the ECB

Paris, 12 January 2022

Many thanks for inviting me to join you today.

State of play in the banking sector

As we recently marked the start of a new year, I think this is an opportune moment to take stock of the current situation and consider the outlook for the European banking sector.

Overall, the European banking system has proven resilient in the face of the coronavirus (COVID-19) pandemic. This was thanks first of all to the regulatory reforms introduced since the great financial crisis, providing banks with higher and stronger loss absorbing capacity, as well as to the implementation of a strengthened European institutional framework, including European banking supervision. The latter not only decisively pushed banks to clean up their balance sheets throughout the post-crisis period, but also enabled a swift and unified supervisory response to the pandemic as it broke out, providing forward guidance and supervisory relief to all institutions across the euro area. The role played by regulation and supervision during the pandemic is a forceful reminder of the importance of completing regulatory and institutional reforms in the euro area to make the banking sector as resilient as possible to future shocks.

Public support also played a key role. An unparalleled level and array of support measures – ranging from extraordinarily accommodative monetary policy to loan moratoria, loan guarantees and fiscal transfers in favour of bank customers – directly and indirectly protected banks’ balance sheets.

As a result, banks remain generally well capitalised, hold ample liquidity and are able to perform their key role as lenders.

While the extraordinary public support measures have prevented a surge in the level of non-performing loans, which have in fact continued to fall during the pandemic, a strong focus on risk controls remains of the essence: the full impact of the pandemic on asset quality may only become apparent once these measures are fully phased out. Classifications of loans as underperforming (stage 2) remain higher than before the pandemic and loans that have benefited from COVID-19 support measures appear to have a slightly higher risk profile. Risks may be more pronounced in sectors particularly affected by the pandemic, such as accommodation and food services or commercial real estate. In addition, there is continued uncertainty about the future path of the pandemic and the impact of current supply chain bottlenecks. This is why improving banks’ credit risk management remains our top priority. In this context, we will follow up on last year’s work to ensure that banks address any weaknesses in their credit risk measurement and management practices that we have identified in our Supervisory Review and Evaluation Process (SREP). We will also look closely at banks’ exposures towards sectors hit particularly hard by the COVID-19 shock by carrying out targeted reviews and on-site inspections.

We are also concerned that, following a prolonged period of low interest rates, investors’ search for yield and excessive risk-taking may make financial markets vulnerable to abrupt asset price corrections and disorderly deleveraging. The leveraged finance sector, which deals with loans to highly indebted borrowers, is one particular area of concern. Issuances have continued to increase during the pandemic, while the corresponding lending standards have been loosened, showing little adherence to supervisory expectations formulated well before the pandemic. We will carry out targeted on-site inspections to ensure that banks strengthen their risk management practices for this type of lending. Another area of concern is residential real estate, where vulnerabilities are building up in several countries – as recent work by the ECB[1] has shown.

European banks are facing a number of challenges

In addition to these more cyclical challenges, our banks are facing a number of structural challenges, which the pandemic is bringing further to the fore. European banks have been struggling with low levels of profitability for more than a decade now. Bank valuations and profitability are generally higher in the United States than in Europe. One structural reason for this is that European banks face greater difficulty in reaping economies of scale and scope than their US peers, as they are not really operating in a truly integrated single market for financial services.

Moreover, banks are facing two major structural shifts: an intensifying digital transformation process and the green transition.

The digital transformation process should be seen as an opportunity for banks to become more efficient and find new sources of revenue. And some banks are already taking this opportunity. We will need to have a strong supervisory focus on the IT and cyber risks that may increase as banks introduce new digital initiatives of their own. Moreover, we will help to ensure a regulatory level playing field between banks and big tech and fintech firms in relation to those risks that warrant a uniform approach across different types of entities. We welcome the current legislative discussions on these topics, such as the Digital Operational Resilience Act (DORA) and the Regulation on Markets in Crypto-assets (MiCA), and we hope to see good progress in this area during the French Presidency of the Council of the European Union.

The second structural shift facing the banking sector today is the green transition.[2] The climate crisis is exposing our banks to physical and transition risks, which they need to be ready to manage. Banks will need to strengthen their risk management frameworks and reassess their business strategies.[3] A recent ECB assessment shows that banks have made some progress in adapting their practices to manage these risks, but none are close to meeting our supervisory expectations.[4] So more work is clearly needed. To that end, we have already planned a number of specific supervisory measures for next year and beyond, including a thematic review of banks’ environmental risk management practices and a stress test on climate-related risks.

The need to update our regulatory and institutional frameworks

As I have already mentioned, the regulatory reforms that followed the global financial crisis made our banking system stronger, which has proven crucial during the COVID-19 crisis, as the comfortable capital and liquidity positions enabled banks to continue supporting households, small businesses and corporates at the onset of a very harsh recession.

We encourage EU co-legislators to swiftly adopt the European Commission’s recent banking package. The implementation of the final Basel III standards effectively addresses important issues concerning the reliability and consistency of capital requirements, especially when risk-weighted assets are calculated by the banks themselves via their internal models. I sometimes read that these standards would not be well suited to European banks and would overlook some specific characteristics of their business models. But many of the proposed regulatory changes actually stem from research that was conducted by the European Banking Authority and the ECB and focused on issues identified in the use of internal models by European banks. We also welcome the fact that the package proposed by the Commission goes beyond implementing the final set of internationally agreed Basel III standards and introduces desirable changes in other areas, such as environmental, social and governance (ESG) risks and the criteria for assessing whether the members of a bank’s management body are, individually and collectively, fit and proper.

I am aware that there are some concerns about the impact of the Basel III rules on the financing of the EU economy, and we listen to vocal calls for several deviations from these standards. Our own policy advice is that the EU should avoid any substantive deviations from Basel. ECB analysis shows that keeping the commitment we made when signing the 2017 Basel accord will result in a net benefit for our economy: the contained and transitory short-term costs in terms of GDP growth that are associated with the full and faithful implementation of Basel III are far outweighed by the medium and long-term benefits for our economy of a more resilient banking sector that is better able to withstand future shocks. The Basel standards are the cornerstone of financial stability and provide a level playing field in global banking. Any deviation – be it temporary or permanent – would not only weaken the EU’s defence against a financial crisis; it would also damage the international credibility of the sector.

One of the most controversial proposals in the package is what is known as the output floor, which aims to reduce the variability in how banks’ internal models measure risks and the regulatory benefit that more sophisticated banks can enjoy compared with other banks using standardised approaches. We welcome the Commission’s decision to pursue the single-stack approach, which will ensure that the output floor will provide the protection it is supposed to deliver. However, we do have some concerns about the transitional provisions in the current draft, particularly those concerning exposures to residential real estate and unrated corporates, as they could noticeably undermine the positive impact of the output floor in important areas. As current financial market developments show, key areas such as residential lending are easily prone to the build-up of risks and should by no means see the EU unilaterally impose less stringent rules. On our side, we will ensure that we don’t ask banks to make disproportionate efforts and we remain committed to neutralising the purely arithmetic increase of supervisory capital charges – the Pillar 2 capital requirements calibrated on risks not sufficiently covered by Pillar 1 – triggered by the output floor: so long as the underlying risks captured in the SREP have not changed, the absolute capital charges should also remain unaffected by the increase in risk-weighted assets determined by the output floor. We will also avoid requiring extra capital for internal model-related risks which, in our assessment, will already be covered by the output floor or other regulatory changes introduced with the new package. Lastly, in line with our objective of building a truly integrated banking market, we would like to see the output floor applied only at the highest level of consolidation. Any other design, including the cap mechanism introduced in the Commission’s proposal, is bound to further segment the market and unduly complicate the calculation of capital requirements within banking groups.

The banking package would undoubtedly bolster the resilience and credibility of our banking system. Therefore, we strongly encourage European legislators to proceed swiftly with the adoption of this package. France has an important role to play here, as it will preside over the discussions in the Council of the EU for the next six months.

Moreover, to maintain the stability and reputation of the banking sector, the risks of money laundering and terrorism financing need to be tackled. In this regard, we welcome the current legislative proposals on anti-money laundering and countering the financing of terrorism (AML/CFT). We strongly support the proposal to establish an AML authority at the EU level and we consider it important for this body to have adequate supranational powers and capacity to effectively prevent the misuse of the banking sector for illicit purposes. We look forward to cooperating with this new authority.

Finally, I believe there should be a greater sense of urgency to complete the banking union. Without the third pillar of the construction – a fully fledged European deposit insurance scheme, complementing the Single Supervisory Mechanism and the Single Resolution Mechanism – the banking sector will remain segmented along national lines. Achieving a truly integrated European banking market would put banks in a much better position to finance the green and digital transitions of the European economy. Moreover, and most importantly from a financial stability perspective, it would enable a greater degree of private risk-sharing, so that shocks hitting a region of the banking union would be more easily absorbed, without the need to consider public support measures. The difference in local rules and practices for crisis management is a key concern, preventing progress towards cross-border banking integration. A revamp of the EU’s crisis management rules would therefore also be welcome, as you noted in your resolution.

As these difficult political discussions take place, I believe there are options within the existing framework which can bring us closer to this goal, such as allowing banks to expand across borders through branches and through the direct cross-border provision of services. It is up to the banks to decide which organisational structure to choose. The increasing digitalisation of banking will make it easier for them to offer their services across borders, while the framework for single supervision should allow a smoother transition to a branch-based structure for all entities willing to take that route – a solution that has already been adopted by many non-EU banks that have relocated to the euro area after Brexit.


Let me conclude by saying that the French presidency of the Council of the EU is an excellent opportunity to make progress on the various topics I have talked about today. We wish France every success in implementing its ambitious agenda and look forward to contributing in our areas of competence and expertise.

  1. ECB (2021), Financial Stability Review, November.
  2. ECB Banking Supervision (2021), “Supervisory priorities for 2022-2024”, December.
  3. Alogoskoufis, S. et al. (2021), “ECB economy-wide climate stress test”, Occasional Paper Series, No 281, ECB, September; Elderson, F. (2021), “Overcoming the tragedy of the horizon: requiring banks to translate 2050 targets into milestones”, speech at the Austrian Financial Market Authority’s Supervisory Conference, 20 October.
  4. ECB Banking Supervision (2021), “The state of climate and environmental risk management in the banking sector: Report on the supervisory review of banks’ approaches to manage climate and environmental risks”, November.

Banco Central Europeu

Direção-Geral de Comunicação

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