The Supervisory Mechanism (MUS), the division of the European Central Bank (ECB) in charge of banking supervision in the eurozone, today announced financial institutions which are priorities for this year. The body chaired by Danièle Nouy, in coordination with national supervisors of the countries of the eurozone, has identified five areas in which close monitoring is required.
The most important issue, as highlighted by the MUS, be risks to profitability and business models of institutions. Both “are affected by the high level of impaired assets and the prolonged period of low interest rates,” warns the supervisor. Therefore, it will focus its actions in making “a thematic review of the factors that determine the profitability of credit institutions at the entity level and the different business models.”
The ECB wants to identify which entities have structural performance problems (related to inadequate business models, legislation and regulations. In addition, monitoring will be intensified to prevent banks to compensate the low profitability returns assuming higher risks, for example by relaxing the criteria for granting loans or increasing reliance on short-term financing.
The MUS makes clear that this issue affects virtually all entities of all countries where the ECB operates. The other priority areas for action, however, have different weights in different countries, depending on the specific situation of each.
One is credit risk. “High levels of morosity demanding greater supervisory attention,” says MUS, especially in countries that have suffered the crisis. Therefore, the ECB has organized a “working group against morosity” which is assessing the situation of the states with high levels of bad loans and “propose actions to follow.” In this area, the only supervision will also focus on reviewing the implementation of the new international accounting standard provisions, already implemented in the first half results.
Although European banks have made significant progress on the issue of solvency, the ECB does not lighten control over capital issues. Supervision will focus on a review of the quality and consistency of the process of assessing the adequacy of internal capital (ICAAP). The ability of entities check for internal tests, and stress tests that will coordinate the European Banking Authority (EBA).
The supervisor will control the ability of banks to meet the new regulatory requirements on solvency issues, as total loss absorption capacity (known as TLAC) and minimum requirements for own funds and eligible liabilities (MREL).
The body of the ECB is also set to review the risks relating to corporate governance risks entities. Specifically, it explains the MUS, “governance risks credit institutions shall be assessed taking into account the context of low profitability and the consequent search of profits and abundant financing and low price offered by central banks.
One of the reasons for the crisis, recalls the supervisor, is that the boards of directors of the entities did not have instruments and enough information for a proper assessment of the risks. This problem has to be corrected and the MUS ensures that banks will make clear what their criteria when evaluating each entity has acted to prevent these problems from recurring. Not only the Councils must have access to all information necessary for proper risk assessment, but care must be taken “quality of data” and “the ability to aggregate risk level of the organization,” explains MUS.
The supervisor will conduct a specific review of these issues of governance and in it a review of the computerized risk is also included, as both data quality and aggregation require entities to equip themselves with adequate information structures.
Finally, and although the current situation does not present problems because of the actions of the ECB, the MUS also continues to closely monitor liquidity. Tests conducted last year, the agency says, have shown that there are still banks that do not properly manage the liquidity risk. So in 2016 the main task will be the review of internal control processes and management of this risk