As of: February 13, 2024, 1:07 p.m
By: Lars-Eric Nievelstein
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Banks are not paying enough attention to new risks on the markets.
Claudia Buch, the new top ECB banking supervisor, warns, among other things, of cyber attacks.
At the same time, the number of bad loans is increasing.
Frankfurt am Main – The new ECB banking supervisor, Claudia Buch, warned the European banks with clear words.
Between lowered growth forecasts, climate-related risks and more and more cyber attacks, they would have to prepare for significantly greater economic and geopolitical risks.
There can be no question of short-term trends.
Rather, it is about structural changes that require “adjustments at company and industry level”.
She foresees more corporate bankruptcies and credit risks.
ECB banking supervisor |
Claudia Buch |
|---|---|
This is how many major banks the ECB monitors |
110 |
Share of bad loans in Germany |
1.1 percent |
Decline in the quality of major banks’ assets – banks have to react to new risks
The former Vice President of the Bundesbank has been in charge of ECB banking supervision since the beginning of the year.
In her first major speech in Brussels, she warned that the new risks were “only inadequately” taken into account in the risk management processes of financial institutions.
“Banks’ decisions could therefore be based on incorrect or incomplete information,” she said.
The ECB currently monitors around 110 major banks within the euro zone, for example Deutsche Bank and Commerzbank.
The European Central Bank in Frankfurt am Main.
One of the ECB's tasks is to check the quality of loans within Europe.
© IMAGO / Arnulf Hettrich
According to Buch, the quality of the assets of the major banks has begun to decline.
The number of bad loans has been increasing since 2023, albeit at a low level.
According to the book, the approaches that banks are using to deal with the new risks are not sufficient.
That's why the supervisory authority has demanded improvements and wants to check whether the banks are implementing the new requirements.
ECB pays attention to non-performing “bad” loans
A brief digression: Preventing non-performing loans in the European banking system is one of the central bank's priorities.
The ECB classifies loans as non-performing if it is foreseeable that the borrower will not be able to properly pay the agreed installments and interest.
For this reason, banks keep a close eye on every loan and pay attention to whether there is a foreseeable risk of default.
As long as the borrower is doing well financially and has a stable job, there is nothing to worry about.
According to the “Risk Dashboard” from the European Banking Authority (EBA), the quality of loans in European banks is still quite stable.
The “deteriorating and uncertain macroeconomic outlook” is not yet having a direct impact on households and companies.
The proportion of “bad loans” (the EBA uses the NPL ratio to measure the proportion of “non-performing loans”) is a “stable” 1.8 percent.
First signs of deterioration visible – risk from bad loans
Those particularly affected here are Greece (NPL rate 4.1 percent), Hungary (3.1 percent), Poland (4.4 percent), Spain (2.8 percent) and Portugal (2.8 percent).
“Some early signs of deterioration are emerging, with higher non-performing loan inflows at the start of 2023, particularly in sectors sensitive to economic downturns, such as real estate exposures,” the latest “Risk Dashboard” says.
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In a press release, the EBA states that although banks within the eurozone are operating "highly profitably", they are seeing a deterioration in credit quality while high interest rates are affecting potential borrowers.
Digitalization in the banking sector – breakdowns and cyber attacks pose risks
Claudia Buch also warned of risks associated with the digitalization of the banking sector.
Nowadays, as soon as a bank comes under pressure, customers can withdraw their deposits at lightning speed - thanks to online banking.
The Silicon Valley Bank case in spring 2023 showed what effects this can have on a bank.
At that time, large numbers of companies had withdrawn their deposits from the SVB.
Within a very short period of time, they withdrew billions from the bank.
The payout process caused the SVB to collapse.
“We will therefore focus on the financing and liquidity risks in this new environment, including through targeted reviews of financing plans,” announced Buch.
BaFin warns of cyber attacks in the financial sector
The Federal Financial Supervisory Authority (BaFin) has recently focused more attention on digital risks.
Cyber attacks and IT breakdowns are among the greatest risks for the financial sector.
The problem is that these disruptions do not even have to occur at banks or insurers themselves.
“Companies in the financial sector must be resilient – against financial and operational risks,” explained Mark Branson, President of BaFin, in a company announcement.
In some areas of the German economy, IT services are provided by a few companies, which serve the majority of credit institutions and insurers.
This brings with it clear risks.
BaFin specifically defined seven main risks for the German financial market:
Significant interest rate increases
Corrections in the real estate markets
Significant corrections on the international financial markets
Loan default by German companies
Cyberattacks
Inadequate money laundering prevention
Too concentrated outsourcing of IT services
With material from Reuters