The European Central Bank (ECB) must strengthen its supervision of EU banks to ensure that credit risk is "well managed and covered" and thus avoid bankruptcies, the European Court of Auditors demanded on Friday. In a "special report" written on the supervisory activities of the ECB, which has been in charge of it since 2014, the European auditors call on the monetary institution to "strengthen its supervision of the credit risk of banks in the European Union to ensure that they manage it properly, in particular when loans are not repaid," according to a statement.
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The ECB also insufficiently tightened prudential measures when banks allowed weaknesses in their credit risk management to persist, the report said. Assessments of banks' credit risk and supervisory systems are generally "of good quality", but then "tools" are lacking to "ensure that the identified risks are fully covered by additional capital", according to the document. In other words, the calculation method for the amount of capital that a bank must hold in addition to the regulatory minimum does not guarantee adequate risk coverage, the Court said.
The ECB must "make every effort
»Also, the ECB "must do everything possible to prevent banks from failing because they have mismanaged their credit risk," Mihails Kozlovs, the ECA member responsible for the report, said in a statement. This is an imperative "given the importance of confidence in the banking sector and the deteriorating economic climate," he said. The auditors also point to the lack of staff assigned by both the ECB and national authorities to banking supervision, and deplore the excessive length of the supervisory phases in 2021, which may have led to outdated assessments. At the same time, they acknowledge that the volume of bad loans in banks has decreased in recent years as a result of several factors, including ECB actions.
In a written reply, the ECB disagrees with certain criticisms, considering in particular that "its current methodology for setting additional capital requirements (...) ensures adequate coverage of all significant risks'. The institution directly supervises 110 of the largest banks in the euro area under a single supervisory mechanism set up in 2014 in response to the 2008 financial crisis and the 2011 debt crisis.