Supervision Newsletter - February 2023

Interview

"Banks are not overregulated"

Sharon Donnery, Member of the ECB’s Supervisory Board and Deputy Governor of the Central Bank of Ireland, talks about how European banking supervision has evolved, whether the NPL guidance has worked and how adherence to the Basel Principles can be improved.

Interview with Sharon Donnery

Feature

Banks’ business models: an uncertain environment needs agile steering

Banks need to adapt quickly to macroeconomic changes in order to thrive. Strategic steering plays a central role in this and can help profitability even in volatile times. Recent on-site inspections show banks’ best practices in this area and where there is room for improvement.

Feature on banks' business models

In focus

Crypto-assets: a new standard for banks

The crypto industry needs standardised rules to become a sustainable part of the wider financial industry including banks. A new Basel Standard that clearly defines how to treat banks’ crypto assets and capital requirements offers a first solution to this.

Article on crypto-assets

Banks’ digital transformation: where do we stand?

A survey assessed banks’ progress adopting new technologies. Investments in technology, staff and governance are key to success, but supervisors flag the need for clearer digital strategies and better measurements. Caution is also needed against risks of third-party dependencies.

Article on banks’ digital transformation

Strong risk culture — sound banks

Risk cultures influence how management and employees take risks and thus impact the safety of our banks. To ensure prudent risk taking, the tone from the top and the capacity to challenge board members are key, together with proper renumeration and incentive schemes.

Article on risk culture

Banking on resilience: navigating persistent and emerging issues

Scores from the SREP 2022 remained stable overall. Banks’ profitability increased and capital and liquidity positions remained solid. Weaknesses in governance and business model persist while digitalisation and climate risk require further supervisory attention.

Article on SREP

Key data

Derivatives as a key driver of total assets growth

Derivatives stood at €2,679 billion in Q3 2022, a rise of €1,076 billion (+67%) compared to the same quarter in 2021 and the highest reported value since 2016. Derivatives comprised 9.65% of total assets, which were amounting to €27,771 billion in Q3 2022 (+8% compared to total assets in Q3 2021). Liabilities increased by a similar amount.

Supervisory banking statistics

Did you know...

… that fiscal measures to counter the effects of the coronavirus (COVID-19) affected banks’ internal-rating based (IRB) data? In the course of the COVID-19 pandemic, European countries implemented measures to counter the effects of the crisis, which have impacted banks’ IRB-relevant data via two channels: directly through the change of credit contracts due to moratoria or public guarantee schemes, and indirectly through the impact of support measures on the input parameters of rating models. To assure the representativeness of IRB-relevant data and to guide banks, the European Banking Authority drafted four principles on how to include COVID-19 data in IRB models. ECB Banking Supervision is responsible for checking whether banks are following these principles to avoid distorting their data. This is why the ECB is running a horizontal analysis on banks’ implementation of the EBA COVID-19 principles in 2023.

21 March 2023: Andrea Enria at regular European Parliament hearing
The Chair of the Supervisory Board will discuss current issues related to banking supervision with the members of the European Parliament’s Economic and Monetary Affairs Committee (ECON).
27 March 2023: Frank Elderson at the Foreign Bankers’ Association
The Vice-Chair of the Supervisory Board will outline the ECB’s vision and plans for a better climate and how banks can best contribute to it.
28 March 2023: Andrea Enria at Handelsblatt’s Banking Regulation Conference
The Chair of the Supervisory Board will discuss supervisory practices for the years ahead.
17 April 2023: Elizabeth McCaul and Anneli Tuominen at European University Institute event on governance
ECB representatives to the Supervisory Board will discuss the topic of governance and its importance for the future of banking.
26 April 2023: Anneli Tuominen at ECB Supervisory Reporting Conference
ECB representative to the Supervisory Board will present the ECB’s stance on reporting requirements in the banking sector.
2 May 2023: Andrea Enria at ECB Banking Supervision Research Conference
The Chair of the Supervisory Board will discuss the supervision of crypto-assets and financial technology.
5 May 2023: Frank Elderson at European University Institute’s State of the Union event
The Vice-Chair of the Supervisory Board will discuss the importance of climate and environmental risks in the financial sector.
26 May 2023: Andrea Enria at 24 ORE Group’s Trento Festival of Economics
The Chair of the Supervisory Board will participate in an open exchange of views at one of the events.

Upcoming public speeches

8 February 2023: Publication of 2022 SREP results and introductory Statement by Andrea Enria at press conference
The ECB is keeping capital requirements unchanged as banks show resilience in an uncertain economic environment. Persistent weaknesses need to be addressed, particularly in their risk control and governance frameworks.
Introductory statement
31 January 2023: Press release about 2023 stress test launch
As part of the regular EBA-led EU-wide stress test the ECB will examine 57 of the euro area’s largest banks, selected to cover broadly 75% of the area’s banking assets.
Press release: ECB to stress test 99 euro area banks in 2023
20 January 2023: Speech by Frank Elderson at European Financial Services Round Table
Banks are lagging behind in integrating climate and environmental risks into business models, strategies, governance and risk appetite. The ECB’s supervisory expectations can guide them on how to catch up.
Speech: The management of climate-related and environmental risks in the banking sector through the lens of supervision
13 January 2023: Blog post by Andrea Enria on counterparty credit risk
Banks should be well prepared and manage their counterparty credit risk at an acceptable level, especially when dealing with the growing non-bank sector.
Blog post: Tackling counterparty credit risk
26 December 2022: Interview with Andrea Enria in Süddeutsche Zeitung
The aim of supervision is to keep banks and ultimately the public safe. This is even more important in volatile times. European banking supervision will therefore stay vigilant and guide banks in the light of upcoming risks.
Interview with Süddeutsche Zeitung
20 December 2022: Blog post by Luis de Guindos and Andrea Enria on interest rate changes
Banks are prepared for interest rate changes. However, the ECB warns about monetary policy’s potential longer-term effects and risk to banks’ asset and liability management.
Blog post: Are banks ready to weather rising interest rates?
19 December 2022: Report on good practices for climate stress testing
Banks should improve in the areas of data collection and modelling to improve their climate stress testing capabilities, according to the 2022 ECB climate stress test.
ECB report on good practices for climate stress testing
13 December 2022: Supervision report on less significant institutions
Less significant institutions have shown increased credit and liquidity risk and no improvement in profitability. They need to consider potential impacts on their balance sheets and capital adequacy, following the crisis.
LSI supervision report 2022
12 December 2022: Blog post by Kerstin af Jochnick and Mario Quagliariello on supervisory priorities
In the light of the supervisory priorities 2023-25, ECB asks banks to remain resilient to immediate shocks. And they should focus on structural challenges such as cyber and climate-related risks.
Blog post: Charting the course: our supervisory priorities
6 December 2022: Speech by Elizabeth McCaul at Kangaroo Group’s Working Group Financial Services
Deviations from Basel III add complexity and costs for all. The EU needs to be more ambitious in meeting the objectives of Basel to ensure soundness, simplicity and a level playing field of the banking sector.
Speech: The EU banking package: in Basel we trust
25 November 2022: Speech by Kerstin af Jochnick at European Society for Banking and Financial Law Conference in Milan
Banks have shown resilience in recent years but should remain cautious in this uncertain environment. Regardless of their business model, they should recognise existing challenges like digitalisation and the green transition.
Speech: Banking stability amid macroeconomic uncertainty

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