On 12 December 2019, the European Central Bank (ECB) published the introductory comments made by its chair, Andrea Enria, at the second ordinary hearing at the European Parliament’s Economic and Monetary Affairs Committee.
In his comments, Mr Enria describes the progress in the Eurozone in reducing risks in the banking sector noting that the volume of non-performing loans (NPLs) has reduced from €1 trillion to €562 billion since the ECB assumed its supervisory responsibilities in 2014. However, despite the good progress in this area, the aggregate level of NPLs in the European banking sector remains elevated by international standards, putting a drag on bank profitability. Mr Enria states that it is essential that more progress is made on this while economic conditions are benign. The ECB is working with national competent authorities on various initiatives to tackle this issue.
Mr Enria also provides an update on the ECB’s targeted review of internal models (TRIM), stating that it is nearing completion. Banks are being asked to remediate the shortcomings identified by the ECB’s inspectors and improve how they implement and use their models to address these findings. TRIM has also confirmed that the ECB needs to continue investing resources in its ongoing supervision of internal models to maintain high quality and consistent standards.
Looking forward, Mr Enria turns to the implementation of Basel III, acknowledging banks’ concerns about the impact of the finalised Basel III rules on their capital requirements. However, the new standards only target those banks that have unduly benefited from the use of internal models to calculate their capital requirements. When considering the impact of Basel III, the ECB will work to prevent any unwarranted consequences for bank-specific Pillar 2 requirements. The ECB is aware of, and concerned about, the low profitability of European banks but relaxing regulation and deviating from international standards is not the solution. Instead, banks should focus on their business models, pursue enhanced cost efficiency and take advantage of the opportunities offered by new technologies.
Digitalisation poses significant challenges for banks and supervisors. Mr Enria states that it is difficult to predict exactly how digitalisation will change the business of banking and the structure of the market. The ECB will remain vigilant and continue to engage with banks and industry players in order to adequately tailor our supervisory approach.
More work needs to be done in respect of the crisis management framework as it remains fragmented and some tools are missing or cannot be used effectively. The early intervention framework should be revised in order to simplify the use of these measures and clarify their relationship with other supervisory measures. Yet, some challenges could be addressed by learning from other jurisdictions.
The third pillar of EU banking union, the European deposit insurance scheme (EDIS) is still missing. The ECB takes the view that a fully-fledged EDIS would remove any justification for the rules and policies that are still preventing full integration of banking business within a single, truly unified domestic market under the banking union.