The EU’s external auditor criticized the way the European Central Bank monitors the eurozone’s biggest lenders, accusing the region’s financial watchdog of being too lenient on credit risk, too slow in deciding capital requirements and lacking sufficient staff.
The detailed critique of how the ECB oversees the 110 most important lenders in the single currency bloc, published from the European Court of Auditors on Friday, shed the spotlight on several areas where the Frankfurt-based institution has agreed to make improvements.
The ECB She said it would speed up the process of defining banks’ capital requirements, which according to the supervisory body took 13 months from the end of the relevant reference period.
It also pledged to address staff shortages that prevented it from carrying out a quarter of priority investigations into banks’ internal risk models and 10% of on-site inspections.
However, the central bank rejected some of the recommendations and said others had already been addressed since a team of external auditors reviewed the central bank’s oversight of lenders in 2021.
Its methodology for setting capital requirements for banks “ensures that all material risks to which an institution is exposed are adequately covered,” he said.
THE ECB she was tasked with overseeing the eurozone’s top lenders following the banking meltdown and sovereign debt crisis that hit the region more than a decade ago. This led to the creation of its Single Supervisory Mechanism in 2014 as a separate unit from the central bank’s monetary policy operations.
“Our overall conclusion is that the ECB [has] it has stepped up its efforts in supervising the credit risk of banks, and especially non-performing loans,” the European Court of Auditors said in its 121-page report. “However, more needs to be done for the ECB to get more assurance that credit risk is adequately managed and covered.”
The main area of disagreement between the auditor and the ECB was how aggressive it should be in pushing eurozone banks to reduce their high levels of non-performing loans.
The auditor, who focused on overseeing 10 lenders with high levels of bad debt, said officials were too reluctant to use their full powers and ended up applying them unevenly, which it has been giving the banks with the highest levels of toxic loans too long to address the problem.
“Those with a higher share of non-performing loans were given more time than others and banks were able to choose a hedging approach that was more beneficial to them,” the auditors said.
But the ECB said the process of reducing souring loans “cannot be carried out overnight without significant negative consequences for the broader economy”. He stressed that he had finally achieved his goal as toxic debts fell steadily from over €1bn eight years ago to less than €350bn last year, accounting for less than 2% of total loans.
The auditors made three main recommendations for the ECB: streamline the supervisory process, strengthen banks’ risk assessment and use more effective measures to ensure that banks manage risks better.
The central bank accepted the first recommendation, saying it was “considering ways to shorten” the time it takes to set banks’ capital requirements. But he only partially accepted the other two recommendations, rejecting calls to lift the hiring freeze imposed on all existing ECB businesses this year.
The ECB said that staff had been added instead of external consultants. Next year, it will examine whether “more formal escalation processes” are needed to push national central banks to staff more joint teams. It said there was still a 4 percent staff shortage at the supervisor, which employs about 1,600 people.
Some concerns had already been addressed, following an overhaul last year of its methodology for assessing credit risk and the addition of an “independent risk supervisory function” that serves as a second line of defense in setting capital requirements for banks.
—————————————————-
Source link