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Financial regulations 24 Mar 2017

Brexit and fintech, in the ECB’s supervisory agenda

The ECB has published its annual report on the supervisory activities appointed to it by the Single Supervisory Mechanism. Key achievements in 2016: effectively addressing the non-performing loan (NPL) issue, the improvement the solvency of the euro area banking sector and the further harmonisation of banking supervision in the euro area. In the spotlight for 2017: new challenges, like the new scenario for European banks after Brexit and fintech-related risks.

In this document, Danièle Nouy, Chair of the ECB’s Supervisory Board, says she feels very proud of what the institution has achieved in supervisory matters. On the plus side, she notes in an interview published in this same document that “we further harmonised banking supervision in the euro area,” and banks of the euro zone “have become much more resilient.” However, she warns about the challenges that banks still have to face, such as “raising profits in a challenging environment” with low interest rates, cybercrime and other technology changes.

In 2016, the ECB “continued to improve its main tool: the Supervisory Review and Evaluation Process (SREP). As a result, banks’ capital requirements were more closely matched to their individual risk profiles.  The report also emphasizes the stress stets that the ECB Banking Supervision conducted for euro area banks and which showed that the banking system can withstand an even more severe stress impact than the one simulated in the 2014 comprehensive assessment.

However, as Mario Draghi points out in the foreword of the document, “challenges remain, however. The banking sector’s capacity to fully support the euro area’s recovery is curtailed by its low profitability. Overcapacities, inefficiencies and legacy assets contribute to banks’ low profitability.”

European Central Bank

ECB

Regarding the supervisory priorities for 2017, Danièle Nouy indicated that the institution “will further analyse banks’ business models and go on exploring their profitability drivers,” and that “we will also assess how developments such as FinTech and Brexit might impact the business models of banks in the euro area. The ECB will also focus on risk management, which she dubs more important than ever.”  Especially, “credit risk, which mainly refers to non-performing loans.”

Also, the ECB is calling for increasing regulatory certainty in the financial sector. Thus, it recognizes that “ambiguity surrounding future regulation is also an issue. The completion of the Basel III review, the determination of minimum requirement for own funds and eligible liabilities (MREL) targets will reduce regulatory uncertainty and make the banks’ operating environment more stable.”

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