20 November 2024

ECON: Introductory statement by Claudia Buch, Chair of the Supervisory Board of the ECB,

I would like to provide an update on the European banking sector’s resilience and potential vulnerabilities, our supervisory efforts to ensure that the sector remains resilient, and the legislative foundations required to further strengthen our ability to respond to future challenges.

Risk outlook

European banks are operating in a macroeconomic environment characterised by a moderate growth outlook, subject to considerable uncertainty. The gradual recovery in economic activity and expectations of further monetary policy easing have led to benign risk pricing in financial markets, which could result in sudden shifts in market sentiment. Protectionist tendencies could disrupt the global supply chains that are essential to European industries, with a negative impact on firms’ growth potential, competitiveness and financial resilience. These cyclical developments are further amplified by long-lasting structural challenges, such as an ageing population, low productivity, and weak innovation dynamics.

The European banking sector is well capitalised. Strong capital positions allow banks to provide funding to the real economy. While lending growth has slowed down since mid-2022, the volume of loans available to households and firms did not, overall, contract. Banks tightened credit standards, reflecting their perception of heightened risk and lower risk tolerance. Lending dynamics were also affected by the negative impact of higher interest rates, weak investment, and worsening consumer confidence on loan demand.^[1]

Banks’ resilience in terms of capital and liquidity buffers, including during periods of stress in recent years, is due to several factors. Better regulation and supervision have certainly played an important role, as better capitalized banks tend to show more stable lending patterns also during crises. In addition, banks have benefited indirectly from policy measures taken in response to exogenous shocks. Loan losses have remained muted. Looking ahead, however, public policy may be more constrained in buffering shocks, potentially putting larger demands on the financial sector’s own resilience.

In an environment of heightened geopolitical risks, the likelihood of tail events materialising has risen. Adverse events are difficult for banks and markets to predict or quantify, as traditional risk models fail to capture their uncertain nature. This may lead to a delay in identifying emerging risks. However, these events impact banks through the traditional risk channels such as credit, market, liquidity, and operational risks. For instance, surges in energy prices can place a strain on energy-intensive industries, affecting corporate creditworthiness and exposing banks to higher default rates. Escalating geopolitical tensions can increase financial market volatility, triggering asset price corrections. Financial sanctions or cyber-attacks can exacerbate risks.

Management bodies should thus ensure that banks are sufficiently resilient from a financial and operational perspective. This requires risk management frameworks that capture adverse scenarios relevant for each bank. In addition, banks should reduce vulnerabilities to geopolitical risks through provisioning practices, capital planning, cyber resilience, and outsourcing arrangements.

Strengthening supervision

ECB Banking Supervision is adjusting to this new environment to better identify and address emerging risks. An ongoing comprehensive reform of the Supervisory Review and Evaluation Process (SREP) aims to make supervision more efficient, effective, and intrusive. Our objective is to facilitate more focused risk assessments by supervisors, enhance our communication with banks and ensure that banks remediate supervisory findings more quickly. Supervisory tools such as moral suasion and recommendations are always used first, but we will then use increasingly binding tools to ensure that banks address any identified shortcomings in a timely manner. These include quantitative and qualitative measures or sanctions and enforcement measures, such as periodic penalty payments.^[2] In addition, we are currently simplifying our methodology for the Pillar 2 requirement (P2R), and we will communicate key elements of this soon....

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