The European Central Bank (ECB) has published a speech by Sabine Lautenschläger (Member of the Executive Board of the ECB). The speech is entitled Start of the Single Supervisory Mechanism: from the comprehensive assessment to day-to-day supervision.
At the beginning of her speech Ms Lautenschläger states that the recently completed comprehensive assessment was an important milestone and has provided the ECB with an immense amount of information on the banks that will be subject to direct ECB supervision. Having concluded this major project the ECB is now moving on to its daily supervisory role under the single supervisory mechanism (SSM), building on its findings and incorporating them into the broader range of its supervisory activities.
In relation to the ECB’s next steps Ms Lautenschläger makes the point that the immediate task is to incorporate the full spectrum of relevant findings into its regular activities. In particular, as example of the ECB’s prudential follow up work it expects banks to incorporate the additional non-performing exposures identified in the asset quality review (AQR) in their supervisory reporting of financial data. Banks and their auditors should carefully assess how this should also be reflected in the level of provisioning. Also certain findings from the AQR will also need to be reflected prospectively in banks’ financial accounts for the year 2014. For instance, this is the case where the credit file review identified inadequacies in provisioning levels which derive from estimates which can no longer be considered as sufficiently conservative in light of the evidence gathered throughout the comprehensive assessment.
Turning to the qualitative findings of the comprehensive review, Ms Lautenschläger notes that the AQR has in a number of cases revealed structural weaknesses in banks’ data systems, not only but in particular for some banks that had recently merged with or acquired other banks. Ms Lautenschläger states that there is an urgent need to improve those systems and that banks will be required to do so.
Another issue that Ms Lautenschläger mentions is that there are strong divergences in the degree to which individual banks currently benefit from transitional adjustments in their CET1 calculation. She adds that the drivers of such divergences will be carefully examined as will banks’ overall capital situation.