On 20 November 2018, the European Central Bank (ECB) published a speech given by Daniele Nouy, Chair of the Supervisory Board of the ECB, at an ordinary hearing for the European Parliament’s Committee on Economic and Monetary Affairs.

The speech is focused around four areas:

  1. key developments and risks in the euro banking area: euro area significant institutions have further increased their resilience throughout 2018 – banks directly supervised by the ECB maintained strong capital positions, with a Common Equity Tier 1 (CET1) ratio of around 14%. In mid-2018 the gross non-performing loan (NPL) ratio for banks under ECB supervision fell to 4.4%, down from 7.5% in early 2015. More generally, political risks are growing globally that threaten to impact banks (i.e. trade protectionism);
  2. supervisory activities: the ECB is working with banks on further reducing NPLs – banks with high levels of NPLs have submitted their NPL reduction strategies to the ECB. Joint supervisory teams are in dialogue with banks on their strategy implementation. Looking forward, the ECB will conduct a focused stress test in 2019 to assess banks’ resilience against liquidity shocks;
  3. outcomes of the 2018 EU-wide stress test:  the 33 largest banks directly supervised by the ECB have become more resilient to financial shocks over the past two years. ECB supervised banks entered the exercise with a much stronger capital base than they had two years ago: their CET1 ratio stood at 13.7% in 2018, up from 12.2% in 2016. Whilst the results were generally positive, the ECB notes that work needs to be done on business models and on legacy issues, including NPL levels that remain a significant concern for a large number of euro area institutions; and
  4. legislative steps: improvement is needed in the Pillar 2 framework, where there is a need to preserve supervisory discretion when addressing banks’ risks as well as the ability to require banks to use the best loss-absorbing capital. A more European approach to combatting money laundering is also stressed. The EU as a whole should consider a higher level of harmonisation of the applicable rules in the form of a regulation.