The European Court of Auditors wants stricter oversight of bank credit risks

The ECA notes that despite greater efforts to monitor credit risk and banks’ non-performing loans, the ECB has not imposed higher capital requirements on high-risk banks. Supervision of banks with persistent deficiencies in credit risk management is also not tightened enough, according to European auditors.

The ECB supervises 110 major banks in the twenty euro countries and Bulgaria, which together form the Banking Union. The largest banks in these 21 countries collectively hold nearly 82 percent of banking assets in the banking union. These banks are assessed every year on the risks they face with defaulting borrowers. This may be because credit terms are poor, but risk management, business model and liquidity also play a role.

Restlessness

Since 2017, the EU has been working hard to reduce risky loans from banks, especially non-performing loans (NPLs). These are considered uncollectible if the borrower does not pay for at least ninety days. It is generally assumed that this will not happen after that. Since the financial crisis in 2007, the mountain of bad loans has risen to one trillion euros.

The ECA says the ECB should ensure banks manage credit risk well ‘in the interests of confidence in the banking sector and the current challenging economic environment’. The court makes the recommendations less than two months after Switzerland’s Credit Suisse was bailed out by rival UBS after a series of scandals at the government’s insistence.

In the US, too, the banking sector is still reeling, where mid-sized banks such as Silicon Valley Bank, Signature Bank and First Republic Bank have collapsed. One reason is that they did not adequately protect themselves against the risks of sharp rises in interest rates that devalued their old investments. Politicians also criticized the role of financial regulators such as the Federal Reserve.