Supervision Newsletter May 2020
Interview
"The current crisis is a wake-up call"
Andrea Enria, Chair of the ECB’s Supervisory Board, discusses how European banks are managing amid the COVID-19 crisis, whether they are using the recently announced supervisory relief measures, what risks lie ahead and what it all means for Europe.
In Focus
Leveraged lending: banks exposed to risks
Like many other asset classes, global leveraged loan markets are facing headwinds not seen since the financial crisis of 2008-09. Current market conditions represent a real-life test for banks’ underwriting standards and risk management frameworks.
Guarding against IT and cyber risk
In recent months banks have become exceptionally reliant on IT systems owing to the COVID-19 pandemic. The more they rely on IT systems, the more vulnerable they can become to IT and cyber risk. Ensuring comprehensive IT and cyber security is therefore vital.
Taking a pragmatic approach to SREP
ECB Banking Supervision has taken a pragmatic approach to implementing the Supervisory Review and Evaluation Process this year. The process is focusing on banks’ ability to respond to current challenges and the most material risks and vulnerabilities related to the COVID-19 crisis.
Key data
Profitability drops in Q4 2019
The aggregate return on equity (RoE) of euro area banks fell to 5.20% at the end of the fourth quarter of 2019, compared with 6.16% a year earlier. For the first time, the ECB published supervisory banking statistics broken down by business model classification. Returns varied by type of business model, with an RoE of 2.94% for custodians and asset managers and 8.99% for small market lenders. To enable further analysis of the data, the supervisory banking statistics time series available in the ECB’s Statistical Data Warehouse now include all breakdowns – by country, business model, geographical diversification, risk and size.
Did you know...
…that 124 supervisory on-site missions are continuing off-site while restrictions related to COVID-19, such as travel bans and compulsory teleworking, are in force? The missions, which comprise on-site inspections and internal model investigations at directly supervised banks, all started before the ECB introduced business travel restrictions in early March and will be duly finalised in the coming weeks. Missions that were due to start later in 2020 are under review and may be rescheduled, depending on developments.
Upcoming Events
- 27 May 2020
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Andrea Enria in conversation at virtual IIF European Conference
The Supervisory Board Chair will elaborate on ECB Banking Supervision’s recent actions and priorities.
- 12 June 2020
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Andrea Enria to participate in 24th Annual European Financial Services virtual conference
The Chair of the Supervisory Board will discuss the challenges facing the banking sector and ECB Banking Supervision’s response to the coronavirus crisis.
- 14 July 2020
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European Parliament – regular hearing of Supervisory Board Chair Andrea Enria
The Chair will discuss current issues related to banking supervision with the members of the European Parliament’s Economic and Monetary Affairs Committee (ECON).
Recent Highlights
- 12 May 2020
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Blog post by Elizabeth McCaul: A pragmatic SREP delivers appropriate supervision for the crisis
Explains that the approach to the 2020 SREP aims to ensure an efficient and structured assessment of banks and reduce resource intensity compared with normal SREP cycles, which should reinforce the positive impact of the ECB’s recent measures.The Supervision Blog
- 8 May 2020
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Blog post by Pentti Hakkarainen: The first lesson from the pandemic: state-of-the-art technology is vital
Notes that although cyber incidents are inevitable, banks can mitigate the associated risks with actions ranging from staff training to simplifying IT landscapes, while they should always be ready to respond with tried-and-tested processes.The Supervision Blog
- 5 May 2020
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European Parliament – Public hearing of Andrea Enria
Explains ECB Banking Supervision’s response to the coronavirus crisis and the reasoning behind recent decisions to the members of the European Parliament’s Committee on Economic and Monetary Affairs (ECON).Introductory statement
- 20 April 2020
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Interview with Andrea Enria in El Confidencial
Argues that banks will be given ample time to go back to the pre-crisis situation and that the return to normal capital and liquidity levels will be decided on a bank-by-bank basis.Interview
- 16 April 2020
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ECB provides temporary relief for capital requirements for market risk
Temporary reduction in capital requirements for market risk, by allowing banks to adjust the relevant supervisory component, aims to maintain banks’ ability to provide market liquidity and continue market-making activities.Press release
- 31 March 2020
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Interview with Andrea Enria in the Financial Times
Describes the recent decisions taken by the ECB to facilitate the flow of credit and calls on banks to keep capital resources within the banking system in order to boost their capacity to absorb losses and support lending.Interview
- 27 March 2020
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Blog post by Andrea Enria: How ECB Banking Supervision is contributing to fighting the economic fallout from the coronavirus
Explains the rationale behind the recent supervisory measures and recommended dividend restrictions and calls on banks and their shareholders to do their part to tackle the economic effects of the coronavirus pandemic.The Supervision Blog
- 27 March 2020
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ECB recommends that banks should not pay dividends until at least October 2020
Capital conserved by refraining from dividend distributions and share buy-backs can be used to support households, small businesses and corporate borrowers and/or to absorb losses on existing exposures.Press release
- 27 March 2020
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Interview with Edouard Fernandez-Bollo in Revue Banque
Clarifies that all banking activities related to European products or customers must be managed and controlled from entities located in the EU, while banks must also ensure that they are well prepared for a possible hard Brexit.Interview
- 20 March 2020
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ECB provides further flexibility to banks in reaction to crisis
ECB offers banks greater flexibility in prudential treatment of loans backed by public support measures and encourages them to avoid procyclical assumptions when determining provisions, helping banks to fulfil their role to fund households and companies.Press release
- 12 March 2020
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ECB provides temporary capital and operational relief in reaction to coronavirus
The positive effects of an array of measures, ranging from the use of capital and liquidity buffers to flexibility in the implementation of bank-specific supervisory measures, will help banks to support the economy and finance households and corporates.Press release