Supervision Newsletter February 2018
Interview
“Things are moving along the right path”
Pentti Hakkarainen, ECB representative member on the Supervisory Board since February 2017, talks about the challenges ECB Banking Supervision is facing, including in his focus areas of budgetary issues, auditing, and technological advancement.
In Focus
Brexit: Booking models and "empty shells"
Brexit has triggered a discussion of booking models and hedging practices. These can slow the development of local capabilities, which can create operational risks and financial stability issues for the empty shell’s host country.
Capital and risks: inspecting internal models
The ECB inspects banks’ internal models for calculating how much capital they need to hold to adequately cover risks. Close collaboration with national supervisors and a holistic approach ensure that the ECB approaches banks on equal terms.
Fit and proper for better governance
Assessing banks’ board members’ suitability in a consistent manner across the euro area remains challenging. National legal frameworks in the 19 member countries need to be taken into consideration while trying to employ a consistent approach.
Inspecting risks and operations on-site
Inspections on banks’ premises are supervisors’ most intrusive tool and a powerful complement to off-site supervision. They provide in-depth analyses of the situation of banks, focusing on risks, internal control systems, business models and governance.
Outsourcing opportunities and challenges
Technological progress brings new opportunities for banks, but they are not without risks. The ECB is closely monitoring the situation and has conducted a thematic review of banks’ outsourced activities and how they manage the risks.
Key data
CET1 ratios over 10%
The Supervisory Banking Statistics for Q3 2017 show, for the first time, that all banking groups directly supervised by the ECB have CET1 ratios greater than 10%. Moreover, the number of supervised banks with CET1 ratios higher than 20% has remained stable year-on-year.
Did you know...
… that the euro area banking sector has seen a significant degree of consolidation since the financial crisis? Between 2008 and 2016 the number of banks in the euro area declined by 25%, to 5,073. While there are fewer banks in the euro area, they are more profitable and resilient. The regulatory capital ratio (CET1) increased from 8.7% to 16.1%, again from 2008 to 2016. The cost-to-income ratio fell from 67% to 58% in the same period.
Upcoming Events
- Mid-March 2018
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Publication of addendum to NPL guidance
The addendum to the ECB Guidance to banks on non-performing loans will ber published, supplementing the guidance published on 20 March 2017.
- 26 March 2018
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Annual Report: Publication and hearing
The ECB Annual Report on supervisory activities 2017 will be published. Supervisory Board Chair Danièle Nouy will present the report to the Economic and Monetary Affairs Committee (ECON) at the European Parliament.
Recent Highlights
- 7 February 2018
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Annual ECB Banking Supervision press conference
Supervisory Board Chair Danièle Nouy and Vice-Chair Sabine Lautenschläger discuss the progress achieved in European banking supervision in 2017 and the objectives for the future.Introductory statement (with Q&As)
- 24 January 2018
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Speech by Danièle Nouy on issues banks and supervisors need to address in 2018
Argues that conditions have never been better since the financial crisis so now is the time to deal with the challenges banks are facing: enhancing profitability and cleaning up balance sheets.Speech
- 18 December 2017
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ECB's 2017 SREP shows that amount of capital demand remains broadly stable
Outcome of the Supervisory Review and Evaluation Process shows that the capital directly supervised banks are expected to hold will be broadly stable from 2017 to 2018, but profitability and non-performing loan risks remain.Supervisory Review and Evaluation Process in 2017
- 15 December 2017
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ECB publishes draft guide on assessment of internal models for calculating counterparty credit risk
Explains how supervisors assess compliance of internal models for counterparty credit risk and credit valuation adjustment risk with legal requirements and seeks industry feedback by 31 March 2018.Press release
- 30 November 2017
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Financial Times publishes opinion piece by Danièle Nouy on NPLs
Explains that the ECB has a legal obligation to address the banking sector’s vulnerabilities, for example by assessing the provisioning used by banks, and that planned guidance will be applied on a case-by-case basis.Opinion piece
- 24 November 2017
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ECB thematic review finds banks are making progress in implementing IFRS 9 accounting standard
Finds that on the basis of information reported by directly supervised banks that were better prepared in the first quarter of 2017 to implement IFRS 9, the fully loaded average negative impact on CET1 is estimated to be 0.4%.Press release