The focus of banking supervision in Europe in 2021
Speech by Andrea Enria, Chair of the Supervisory Board of the European Central Bank (ECB), in which he analyses the state of the European banking sector and the ECB priorities in 2021, focused on a proper credit risk and cost-efficiency management, both aspects crucial to support the economic recovery in a post covid-19 world.
According to Andrea Enria, the euro area banking sector has responded to the coronavirus (covid-19) pandemic with resilience thanks to the following attributes:
- Strong capital position: That would have allowed the sector to show a slight fall in the Common Equity Tier 1 capital ratio (in the last quarter of 2020 compared with the third quarter of the same year), maintaining levels above those prevailing at the start of the year and before the pandemic.
- Regulatory flexibility in terms of capital, that will continue in 2021 and that have allowed a moderate tightening of credit standards and the lending growth to firms and households in 2020.
In his speech, Andrea Enria remarked the ECB priorities in 2021: “credit risk management standards and cost-efficiency policies would be at the forefront of the ECB supervisory strategy”:
- Credit risk management, understood as the ability of banks to still provide credit to the economy, especially when public support measures are ended, but also as the ability of early recognition of credit impairments, identifying solvency problems, and implementing a proactive management of the problematic exposures (for instance through NPL´s sales and securitizations).
In this regard, he drew attention to the “significant differences in how banks flag their exposures as forborne, which raises concerns that some of them are not taking an adequate approach in this area”, and about the provisioning levels in the banking union, as “they have so far been below the levels predicted by historical elasticities to macroeconomic developments, but this could be explained by the unprecedented public support measures”.
- Cost-efficiency policies: digitalization, cost savings plans and mergers will be very relevant going forward to increase the profitability levels. In this regard, Andrea Enria commented that “the ECB is supportive of well-designed and well-executed business combinations”.