The European Court of Auditors wants stricter oversight of bank credit risks

The European Court of Auditors wants stricter oversight of bank credit risks

The European Central Bank (ECB) must tighten its supervision of the credit risks of big banks in order to prevent bank failures. This was stated by the European Court of Auditors (ECA) in a report on credit risk management in the Banking Union.

Despite increased efforts in monitoring banks’ credit and non-performing loans, the European Central Bank has not imposed higher capital requirements on high-risk banks, ECA notes. According to European auditors, supervision of banks with persistent deficiencies in credit risk management has not been sufficiently tightened.

The European Central Bank supervises 110 major banks in twenty euro countries plus Bulgaria, which together form the Banking Union. The largest banks in these 21 countries collectively hold nearly 82 percent of the banking assets in the Banking Union. These banks are evaluated each year on the risks they take on with borrowers who do not repay their loans. This may be due to the poor terms of the loan, but risk management, business model and liquidity also play a role.

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Since 2017, the European Union has been working hard to reduce risky loans from banks, especially so-called non-performing loans (NPLs). These are considered uncollectible if the borrower has not repaid for at least ninety days. It is generally assumed that this will not happen again after that. After the financial crisis in 2007, the mountain of bad loans rose to a record high of one trillion euros.

The ECA states that the ECB must ensure that banks manage credit risk well “for the sake of confidence in the banking sector and the current challenging economic environment”. The court makes the recommendations less than two months after Credit Suisse bank in Switzerland was bailed out by rival UBS after a series of scandals, at the insistence of the government.

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In the US, too, the banking sector remains unstable, with mid-sized banks Silicon Valley Bank, Signature Bank, and First Republic Bank all collapsing. One reason was that they did not adequately hedge themselves against the risk of a sharp rise in interest rates, which reduced the value of their old investments. Politicians have also criticized the role of financial regulators, such as the Federal Reserve.

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