Stay informed with free updates
Simply sign up to the European banks myFT Digest — delivered directly to your inbox.
The eurozone’s top banking supervisor has warned that lenders “will not be immune” to the consequences of geopolitical turmoil, climate change and other structural shifts that could eat into their recent high profits.
In her first speech as chair of the European Central Bank’s supervisory arm, Claudia Buch noted the prevailing climate of “high uncertainty” and cited a range of concerns from Russia’s full-scale invasion of Ukraine and higher inflation to climate change.
“European banks have weathered recent storms thanks both to their own resilience and to the significant fiscal and monetary support that mitigated the impact of the recent shocks,” said the former deputy head of Germany’s central bank.
“However, in the longer term, banks will not be immune to risks and unexpected events,” Buch added, as she detailed plans for an era of “adaptation” at the 10-year-old agency founded to bring consistency to the eurozone’s banking oversight after the global financial crisis.
Buch became the third chair of the ECB’s Single Supervisory Mechanism (SSM) on January 1. In an interview last summer, she told the FT that supervisors needed to adapt a more “critical mindset”, echoing criticisms by the EU’s external auditor, which warned supervisors were too lax.
“Complacency is not an option,” Buch told an event in Brussels on Monday. Credit Suisse’s takeover by UBS last March marked the first demise of a globally systemic lender since the financial crisis. A clutch of mid-sized US banks also collapsed last year after depositors withdrew their funds with unprecedented speed.
“Many of the issues dominating today’s headlines were inconceivable a decade ago,” Buch said. “This underscores the need for banks not only to respond to emerging risks, but to anticipate them too.”
The ECB will focus its attention on these “new risks” by supplementing its traditional models with “the use of scenarios, improvements in data and measurement, and a close interaction between bank-level and macro-level analysis”. It is also carrying out “targeted reviews” on banks’ funding plans, as global regulators try to design policies for a world where bank runs materialise via smartphone apps rather than high street branches.
Cyber security is another area of attention, with the ECB preparing a “cyber resilience stress test” for the 109 large and important eurozone lenders it directly supervises.
“Once we have identified vulnerabilities and insufficient risk management, we need to take action,” Buch said of the ECB’s approach to supervision generally, adding that governance and risk management were often better indicators of distress than financial measures, which could hold up well right until the point of collapse.
“That is why we pay close attention to banks’ internal governance mechanisms and the long-term sustainability of their business model,” Buch said, echoing remarks from global regulators who attributed the downfall of US lenders last year to management and supervisory failures.
Buch also promised that the SSM would reach out to eurozone consumers to stem tensions over the diverging fortunes of financial systems and wider economies.
“Many people are concerned about rising borrowing costs and financial strain,” Buch said. “They see, at the same time, that banks are highly profitable. This can lead to feelings of injustice.
“That is why we need to explain our role as prudential supervisors — to ensure that banks remain resilient, that they do not take excessive risks, and that they remain resilient also in times of stress.”
Read the full article here
