The European Central Bank’s (ECB) banking supervision has issued a warning to financial institutions operating within the euro area, urging them to maintain a high level of vigilance in the face of a potentially unsafe environment. According to Claudia Buch, the head of banking supervision at the ECB, banks today are better capitalized and more resilient compared to the start of the banking union a decade ago. This statement was made in a speech text released in advance on Monday in Brussels. Buch, who assumed her position at the ECB on the 1st of January, 2024, cautioned against complacency despite the noted improvements.
Buch, who previously served as Vice President of the Deutsche Bundesbank before her appointment to the ECB, pointed out that several factors could pose risks to banks’ business models. These include structural changes in the real economy, emerging risks, digitalization, and increased competition. However, she also noted that financial institutions have recently enjoyed benefits from increased interest rates, leading to higher profits. This positive development provides banks with an opportunity to bolster their resilience by building capital buffers and establishing stable IT infrastructures.
Buch highlighted that there are already evident signs that the quality of major institutions’ assets is beginning to decline. Up until the end of 2022, the rate of non-performing loans (NPL) had been on a near-continuous downward trend. However, since 2023, the rate of loans at risk of default has seen a slight increase, despite remaining at a relatively low level. Buch mentioned that credit risk supervision has recently been geared towards “vulnerable sectors,” such as commercial real estate.
More loans at risk of default again
Despite the recent trend of increasing default risk, the level of these loans remains relatively low. The focus of credit risk supervision has recently shifted towards sectors that are deemed vulnerable, such as commercial real estate.
Established in 2014 in the aftermath of the banking and financial crisis, the ECB banking supervision is responsible for directly monitoring 113 banks in the euro area, which collectively represent 82 percent of the banking market in the currency area. The ECB banking supervision’s objective is to foster greater stability in the financial system by enforcing uniform rules for the largest financial institutions in the euro area.