On 7 October 2019, the European Central Bank (ECB) published its supervisory priorities setting out its focus areas for the single supervisory mechanism (SSM) for 2020. The key drivers of banking sector risk have been identified in a related risk assessment for 2020. These risks centre around economic, political and debt sustainability challenges in the euro area, business model sustainability, and cybercrime and IT deficiencies.

To ensure that banks address these risks, the ECB’s supervisory priorities have been realigned to the high level priority areas of:

  • continuing balance sheet repair. The ECB will continue to engage with affected institutions in relation to the stock of non-performing loans (NPLs) in the euro area. Work will continue on ensuring the adequacy of internal models used by banks in calculating their regulatory capital requirements. There will also be follow-up on the target review of internal models findings and on-site missions with an enhanced focus on trading and market risk;
  • strengthening future resilience. ECB supervision in 2020 will include assessing credit underwriting criteria, dedicated on-site inspections in areas such as real estate and leverage finance, improving banks’ internal capital and liquidity adequacy assessment processes, focus on digitalisation, on-site work on IT risk and SSM-related cyber incident reporting, conducting supervisory stress tests, and improving banks’ governance frameworks; and
  • follow-up on Brexit work. The ECB reiterates its expectations on banks to prepare for all possible outcomes and finalise the implementation of contingency measures for a no-deal Brexit.

On a final note, the ECB states that its outline of risks and supervisory priorities are not exhaustive. Other activities not explicitly highlighted, such as the International Financial Reporting Standard 9 implementation, are being carried out on an ongoing basis.