Felix Hufeld, ECB Supervisory Board member and President of the German Federal Financial Supervisory Authority, talks about the high-level review of the SREP, the importance of the ICAAP, digital developments and other financial services.
With the transition period under way, banks must now accelerate and complete the implementation of their post-Brexit target operating models. They should book and risk-manage EU products within the EU, without creating undue complexity.
Compliance functions are a key component of banks’ second line of defence for managing risks. Recent assessments show that banks need to improve compliance frameworks in three main areas: governance, resources and implementation of policies and processes.
The fundamental review of the trading book (FRTB) introduces major changes to the internal models approach. Ahead of the FRTB’s implementation, ECB Banking Supervision asked banks about the impact of the new rules on their use of internal models.
Benchmarking of recovery plans helps supervisors ensure consistency in their assessments and identify best practices and areas for improvement. Sharing benchmarking results helps banks develop better quality plans for weathering periods of severe financial stress.
ECB Banking Supervision and national supervisors have performed a comprehensive analysis of the euro area’s 2,400 small and medium-sized banks. The analysis covered developments in the banking sector, and banks’ main risks and vulnerabilities.
The total assets of euro area significant institutions have grown in recent quarters, increasing from €21.2 trillion in Q3 2018 to €23.2 trillion in Q3 2019. This was mainly driven by an increase in banks’ loans and advances and, to a lesser extent, by an increase in derivatives. Meanwhile, the aggregated non-performing loans ratio continued its downward trend, standing at 3.41% in Q3 2019, compared with 4.17% in Q3 2018. In parallel, the coverage ratio of non-performing exposures decreased slightly to 44.45% in Q3 2019, down from 46.40% in Q3 2018.
…that ECB Banking Supervision recently published the results of the 2019 Supervisory Review and Evaluation Process (SREP), including – for the first time – banks’ individual Pillar 2 requirements? The results showed that Pillar 2 requirements and guidance for Common Equity Tier 1 capital remained stable overall at around 10.6%.
Governance is an area of particular concern for supervisors. Banks’ governance scores have deteriorated owing to a range of factors, including limited effectiveness of management bodies, weaknesses in internal controls, poor data aggregation capabilities and weak outsourcing arrangements.
Business model sustainability and operational risk are also key areas of ongoing focus for supervisors.