Supervision Newsletter February 2020
Interview
"Taking a closer look at individual risk drivers"
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.
Full interview
In Focus
Brexit: time to move to post-Brexit business models
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.
Strengthening compliance frameworks
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.
Market risk: new rules for internal models
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 for better recovery plans
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.
Taking the pulse of smaller banks in Europe
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.
Key data
Total assets increase, while NPL levels continue to drop
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.
Did you know...
…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.
The Supervisory Review and Evaluation Process
Upcoming Events
- 20 February 2020
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Andrea Enria to give keynote speech at European Banking Institute
The Supervisory Board Chair will elaborate on the ECB’s priorities and discuss supervisory developments.
- 3 March 2020
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Kerstin af Jochnick to be keynote speaker at ISDA high-level public policy conference on EU bank capital reform and regulation
ECB representative to the Supervisory Board will discuss the challenges for the banking sector and the ECB’s priorities for the coming years.
- 5 March 2020
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Andrea Enria to give keynote speech at Delphi Economic Forum
The Chair of the Supervisory Board will give a speech in Delphi, Greece, focusing on current banking regulation and supervision issues.
- 17 March 2020
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Elizabeth McCaul to speak at Morgan Stanley European Financials Conference 2020
ECB representative to the Supervisory Board will elaborate on supervisory transparency and current challenges for banks.
- 19 March 2020
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Annual Report: Publication and hearing
The ECB Annual Report on supervisory activities 2019 will be published. Supervisory Board Chair Andrea Enria will present the report to the Economic and Monetary Affairs Committee (ECON) at the European Parliament.
- 27 April 2020
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Pentti Hakkarainen to speak at Paris international symposium on use of artificial intelligence by financial institutions
ECB representative to the Supervisory Board will discuss the digitalisation of the banking sector and fintech.
- 6 May 2020
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Andrea Enria to speak at 7th Annual Conference on Banking Union
The Chair of the Supervisory Board will give a speech at Goethe University on the state of the banking union.
Recent Highlights
- 5 February 2020
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ECB launches public consultation on guide to assess how banks calculate counterparty credit risk
Guide outlines the methodology the ECB uses to assess the internal models banks apply to calculate their exposure to counterparty credit risk and their own funds required to account for credit valuation adjustment risks. Consultation ends 18 March.Press release
- 31 January 2020
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ECB to stress test 35 euro area banks as part of the 2020 EU-wide stress test led by EBA
Banks to be examined cover about 70% of total euro area assets. The ECB will conduct its own stress test in parallel for the significant banks not included in the EBA exercise.Press release
- 30 January 2020
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Speech by Andrea Enria at the 5th SSM and EBF Boardroom Dialogue
Stresses that the European banking market must become a true single market and that the ECB is considering a range of concrete options to facilitate this.Speech
- 30 January 2020
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ECB publishes risk report on less significant institutions (LSIs)
Thorough analysis of LSIs examined their main risks and vulnerabilities as well as developments in digital-only banking. On average, LSIs maintain capitalisation levels comfortably above minimum requirements.Publication
- 28 January 2020
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ECB publishes the outcomes of its 2019 SREP
Shows that overall requirements and guidance for CET1 remain unchanged at 10.6%. ECB publishes Pillar 2 requirements for individual banks. Business model risk, internal governance and operational risks remain key areas of concern.Press release
- 21 January 2020
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Speech by Edouard Fernandez-Bollo on Basel III finalisation and overall impact of the reforms
Explains that the output floor is a core element of the reform package and that it ensures that risk-weighted assets calculated with internal models do not fall too far below those calculated under standardised approaches.Speech
- 17 December 2019
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ECB publishes amended regulation on supervisory fees
Following public consultations with the industry, the administrative burden for most banks has been reduced, while less significant banks with total assets of €1 billion or less will benefit from lower fees.Press release
- 27 November 2019
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Speech by Andrea Enria on the future of stress testing
Argues that stress tests have become an indispensable tool for supervisors and, since they are not static, there is scope to refine them in order to make them more realistic, relevant, cost-efficient and transparent.Speech
- 25 November 2019
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Speech by Yves Mersch on Basel III and European banking regulation
Contends that full implementation of Basel III will have a positive effect on the economy in the long run. At the same time, supervisors should not breach their promise of no further capital requirements on aggregate.Speech