Sunday

4th Jun 2023

ECB too lax in supervising credit risk, auditors find

  • The European Court of Auditors (Photo: European Court of Auditors)
Listen to article

European Central Bank supervisors are too lax in supervising how they manage credit risk, the EU Court of Auditors said on Friday (12 May).

The auditor has long criticised the ECB for insufficiently pushing the just over 100 banks — 82 percent of the total — it supervises to reduce bad loans. Friday's report now suggests the problem is more profound than previously thought.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

One of the problems highlighted in the detailed report is that the ECB does not follow its own rules consistently. It is also too lenient towards high-risk lenders and also accused the bank of being too slow to decide on capital requirements — up to 13 months, which is "very, very long, longer than the previous year," said Mihails Kozlovs, the ECA member in charge of the report.

"To avoid bank failures due to poor credit risk management, the ECB should ensure that banks manage credit risks soundly", added Kozlovs. "This is crucial given the importance of trust in the banking sector and the challenging current economic conditions."

But the new approach for determining the amount of capital a bank must hold "beyond the regulatory minimum" introduced in 2021 does not guarantee that all risks are covered. The auditors conclude that the ECB has not applied its own rules consistently.

In particular, the ECB did not impose proportionally higher requirements when banks faced higher risks. In fact, for the highest-risk banks, the bank supervisors consistently selected the lowest available capital requirements.

Furthermore, the auditors saw a pattern of the ECB failing to sufficiently escalate supervisory measures when credit risk was high and sustained and control weaknesses persisted. In response to the report, the ECB said it would review its escalation processes and added there was still a four percent staff shortfall.

Interest rate risk

The auditors only looked at credit risk. Interest rate risks, which increase the cost of capital and mortgages, have been raised a record amount since the summer of last year, were omitted.

"We understand [credit risk and interest rates] are linked. Interest rates might lead to borrowers' difficulties," Kozlovs told EUobserver when asked if interest rate risks to businesses and households were included in the overall risk monitoring.

"For the time being, based on the data from the European Banking Authority, there is no significant build-up of non-performing loans," said Kozlovs, adding that "in some sectors, the risk was increasing."

"This only underlines the importance of our call for the rigorous application of the rules," he said.

"Our overall conclusion is that the ECB has stepped up its efforts in supervising banks' credit risk," the auditors concluded in the report. "However, more must be done."

Interview

Current global financial system is a 'dance with death'

"If Brazil is stripping its forests, that is because it has to repay foreign debts. Countries like Brazil, or African countries, are encouraged to borrow dollars instead of their own currency" explains South African economist Ann Pettifor.

Hawkish ECB rate-rise 'puts energy transition at risk'

The European Central Bank raised interest rates by another 0.5 percent to a 14-year high, and expects to hike rates by another half percent in March. But what does that mean for the green transition?

EU escapes recession, but war remains biggest risk to economy

"The main risk to this forecast is based on the geopolitical tensions, and the evolution of the war," EU commissioner Paolo Gentiloni said, adding that "this gives to the economy, investors, companies a high degree of uncertainty".

ECB: eurozone home prices could see 'disorderly' fall

The European Central Bank in its Financial Stability Review warned EU home prices could see a 'disorderly' fall as high mortgage rates are making houses unaffordable for households and unattractive for investors.

Adapting to Southern Europe's 'new normal' — from droughts to floods

Extreme weather events in recent months have worsened agricultural production in southern Europe, prompting concerns for authorities in Portugal, Spain, France and Italy. As countries will likely face dryer conditions, experts urge adaptation measures for the 'new normal'.

EU: national energy price-spike measures should end this year

"If energy prices increase again and support cannot be fully discontinued, targeted policies to support vulnerable households and companies — rather than wide and less effective support policies — will remain crucial," the commission said in its assessment.

Opinion

EU export credits insure decades of fossil-fuel in Mozambique

European governments are phasing out fossil fuels at home, but continuing their financial support for fossil mega-projects abroad. This is despite the EU agreeing last year to decarbonise export credits — insurance on risky non-EU projects provided with public money.

Latest News

  1. Spanish PM to delay EU presidency speech due to snap election
  2. EU data protection chief launches Frontex investigation
  3. Madrid steps up bid to host EU anti-money laundering hub
  4. How EU leaders should deal with Chinese government repression
  5. MEPs pile on pressure for EU to delay Hungary's presidency
  6. IEA: World 'comfortably' on track for renewables target
  7. Europe's TV union wooing Lavrov for splashy interview
  8. ECB: eurozone home prices could see 'disorderly' fall

Stakeholders' Highlights

  1. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  2. ICLEISeven actionable measures to make food procurement in Europe more sustainable
  3. World BankWorld Bank Report Highlights Role of Human Development for a Successful Green Transition in Europe
  4. Nordic Council of MinistersNordic summit to step up the fight against food loss and waste
  5. Nordic Council of MinistersThink-tank: Strengthen co-operation around tech giants’ influence in the Nordics
  6. EFBWWEFBWW calls for the EC to stop exploitation in subcontracting chains

Join EUobserver

Support quality EU news

Join us