The European Central Bank (ECB) has published a statement by Sabine Lautenschlager, Member of the ECB’s Executive Board and Vice-Chair of the ECB Supervisory Board. The statement is entitled Supervising banks – four priorities.
The four priorities that are referred to in the statement are:
- regulation has to remain a global issue. The banking system is global in scope and a global approach to regulating it should be taken. This is not just about the rules themselves but also how they are applied. Globally, there should be focus on how supervision is carried out and how different regulators can learn from each other;
- In the event of a “hard” Brexit, UK banks would have to seek a licence in the EU to do business on the continent. The ECB feels that many banks are a bit too relaxed about this and the message is “the clock is ticking” as obtaining a licence takes some time;
- non-performing loans (NPLs). In some parts of the euro area, banks still have large exposures to NPLs on their balance sheets. In March the ECB published guidance for banks on how to deal with NPLs (see here) and its supervisors are monitoring closely the strategies banks devise and the progress they make; and
- risk management. The ECB feels that risk sensitivity should be central to calculating capital requirements but it also sees internal models becoming more complex making them prone to error and even manipulation. The ECB has launched a major project – the targeted review of internal models. The ECB wants this project to achieve two things: (i) to harmonise the supervisory treatment of internal models and ensure a level playing field; and (ii) ensure that the results of internal models are conservative and driven by actual risks, and not by modelling choices. The ECB believes that this will strengthen trust in the banks’ calculation of risk and, ultimately, in the adequacy of capital buffers.
View ECB statement: supervising banks – four priorities, 13 June 2017
