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An Audit Reveals Flaws In The ECB's Handling Of Bank Credit Risk

An Audit Reveals Flaws In The ECB's Handling Of Bank Credit Risk
The European Court of Auditors (ECA) warned on Friday that European Central Bank supervisors are frequently too lenient with banks in how they manage credit risk, particularly in the case of the worst performers, in a report that highlighted a number of problems.
The European Central Bank (ECB) regulates nearly a hundred of the eurozone's largest banks and has for years maintained that banks do not consider the risk of soured debt very seriously, failing to recognise concerns or set aside provisions.
However, a report released on Friday by the European Union's external auditor reveals that the problem is more systemic than a lack of bank compliance.
The audit concludes that the ECB administers its rules inconsistently, shows favouritism to the most risky lenders, spends a long time to arrive at capital decisions, and occasionally fails to hire enough supervisory employees.
"The ECB did not impose proportionally higher (capital) requirements when banks faced higher risks, meaning that risks are not clearly linked to the requirement imposed," the ECA said.
"For the highest-risk banks, it consistently selected requirements at the bottom of the pre-defined ranges," the report said, adding that it saw a pattern of the ECB failing to sufficiently escalate supervisory measures when credit risk was high and sustained.
As a consequence of this practise, a lower-risk bank may have larger capital demands versus a higher-risk lender, according to the ECA.
The study is the first since the European Central Bank agreed to share sensitive bank-specific data for auditing purposes in 2019, but its suggestions are not legally binding.
The ECB responded in the report's annexe, primarily defending its practises while acknowledging some flaws.
"The ECB is of the view that its current methodology for determining additional capital requirements ensures that all material risks to which an institution is exposed are appropriately covered," it said.
Non-performing loans has been steadily declining for years and are now reaching an all-time low, thanks in part to a vigorous ECB push to free the banking system from a historic encumbrance.
Nonetheless, the research stated that the ECB's methodology for determining additional capital needs since 2021 did not provide assurance that lenders' diverse individual risks were adequately covered.
The ECB also takes too long to release final capital requirement judgements, resulting in risks not always being managed in a timely manner, according to the research.
Another concern was a lack of personnel.
According to the research, the ECB has opted not to raise headcount beginning in 2023, and nine of the 22 national supervisors fall short of staffing joint supervisory teams.

Christopher J. Mitchell

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