Frank Elderson, Vice-Chair of the ECB’s Supervisory Board, talks about monitoring credit risks during the pandemic, addressing current and future climate change risks, and the suitability and diversity of banks’ boards.
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The pandemic may have a delayed impact on banks’ loan books. ECB Banking Supervision assessed whether banks are operationally prepared to deal with an increase in distressed debtors and found a few gaps in their credit risk management.
Some sectors are more sensitive to the pandemic shock than others. The ECB looked into banks’ exposure to the food and accommodation sector and found that not all banks are operating in line with supervisory expectations.
Banks facilitated government support to counter the impact of the pandemic. To find out if banks adequately implemented the financial relief measures, ECB inspectors examined the procedures of selected banks in seven countries.
From June, large investment firms in Europe will be subject to a new regulatory regime that will better reflect the risks they take and make supervision more efficient. These firms will need a banking licence and will be supervised by the ECB.
With benchmark rate reforms just around the corner, banks need to act now to reduce inherent transition risks. They should decrease legacy exposures to rates that will be discontinued and introduce fallback provisions where needed.
In search of higher yields, banks have pursued creative strategies which can increase valuation risk. The interim results of an ECB on-site inspection campaign show that banks’ valuation practices are very diverse and need more attention.
The targeted review of internal models (TRIM) is ECB Banking Supervision’s largest project to date. It looked at how 65 banks model credit, market and counterparty credit risk, with the aim of making internal models more reliable and comparable and supervisory practices more consistent.
The aggregate loan-to-deposit ratio of significant banks under European banking supervision decreased from 116.0% in Q4 2019 to 106.7% in Q4 2020 owing to the large rise in deposits throughout 2020 (up by 8.2%).
… that the ECB will be taking a close look at banks’ credit risk management in relation to the commercial real estate sector? This sector has been particularly vulnerable during the pandemic and by volume represents the largest exposure across banks supervised by the ECB. The recent changes in the sector could be here to stay as tenants’ behaviour may have changed permanently. Tenants of office buildings may want to save costs by increasing the amount of remote working, so proprietors could face further declines in occupancy rates. And renting empty office space to new tenants may be difficult after the pandemic. To prevent this sectoral exposure from posing a material risk to banks, the ECB will make sure that banks adequately identify, assess and measure related credit risk. Banks should take early action to manage or restructure exposures at the first sign of borrower distress.