ECB Annual Report on supervisory activities

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1 Supervisory contribution to financial stability In 2016 euro area banks posted stable profits, but at low levels. At the same time, their risks and challenges remained mostly unchanged compared to those in 2015. The main risk lay in the sustainability of banks’ business models and profitability; other major risks included high levels of non-performing loans and geopolitical uncertainties, such as the medium and long-term impact of Brexit. European banking supervision set its supervisory priorities accordingly. European banking supervision also 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. Overall, the capital demand resulting from the SREP 2016 remained broadly stable. In 2016 European banking supervision made good progress in dealing with nonperforming loans. In September it published draft guidance for public consultation. The recommendations and best practices set out in this guidance will help banks to effectively reduce non-performing loans. 1.1 Credit institutions: main risks and general performance 1.1.1 Main risks in the banking sector and supervisory priorities Main risks for the European banking sector remain unchanged The risks identified in 2016 remain relevant, for the most part, in 2017. Banks in the euro area are still operating in a business environment characterised by low economic growth. The bleak economic performance impacts on interest rates and economic recovery and is driving the main risks faced by the euro area banking sector depicted in Chart 1. The prolonged period of low interest rates supports the economy and reduces the risk of defaults. However, it also puts pressure on banks' business models as low interest rates squeeze interest income in a context where the overall profitability is already low. Risks to the sustainability of business models and low profitability continued to be one of the main concerns for the euro area banking sector in 2016. Banks need to reduce high stocks of non-performing loans Brexit poses a geopolitical risk for banks Another source of concern is high stocks of non-performing loans (NPLs) in a number of euro area banks. Besides diminishing profitability, they leave the affected banks more vulnerable to shifts in market sentiment. Banks therefore need sound and robust strategies to clean their balance sheets, including active management of the NPL portfolios. Geopolitical uncertainties are on the rise. Particularly in the context of the UK referendum on Brexit, <strong>ECB</strong> Banking Supervision was in close contact with the most <strong>ECB</strong> <strong>Annual</strong> <strong>Report</strong> on supervisory activities 2016 − Supervisory contribution to financial stability 9
exposed banks to ensure that they were carefully monitoring the situation and the risks and preparing for the possible outcomes. During this period of time, no material liquidity/funding or operational risks in the banking sector were identified. However, recent political developments may delay investments, leading to sluggish growth. Chart 1 Risk map for the euro area banking system high CCP solvency EA fiscal imbalances Low growth EA Low interest rates NPLs Risk impact Non-bank competition Real estate markets Cybercrime & IT disruptions EMEs & China Risk premia reversal Misconduct Banks' reaction to new regulation EU geopolitical uncertainties Market illiquidity low Risk probability high Source: <strong>ECB</strong>; arrows indicate potential transmission channels from one risk driver to another (only main first order effects are represented); NPL: this risk driver is only relevant for euro area banks with high non-performing loan ratios. Notwithstanding the benefits of a safer and more resilient financial system, 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. In the meantime, banks are also preparing for the implementation of IFRS 9, which will enter into force at the beginning of 2018. On the whole, certain banks may still find it challenging to meet stricter requirements while maintaining adequate profitability. In 2016 <strong>ECB</strong> Banking Supervision conducted the EU-wide European Banking Authority (EBA) stress test for euro area banks and the <strong>ECB</strong> Banking Supervision SREP stress test. 1 The EU-wide stress test covered 37 large significant institutions (jointly representing roughly 70% of the banking assets under European banking supervision). Stress test results for these banks were published by the EBA on 29 July 2016. 2 The SREP stress test covered an additional 56 significant institutions in the euro area. Broadly the same methodology was used in both exercises to assess the resilience of financial institutions to adverse market developments and to provide input to the SREP. 1 2 In order to give consistent treatment to all significant institutions in the SREP, <strong>ECB</strong> Banking Supervision conducted the SREP stress test covering those significant institutions that were not subject to the EUwide EBA stress test. The EBA published details of the stress test results on its website. <strong>ECB</strong> <strong>Annual</strong> <strong>Report</strong> on supervisory activities 2016 − Supervisory contribution to financial stability 10
Page 1 and 2: ECB Annual
Page 3 and 4: 5.2 Feeing framework 2016 67 6 Lega
Page 5 and 6: Introductory interview with Danièl
Page 7 and 8: Speaking of banks, how are the Euro
Page 9: European banking supervision has th
Page 13 and 14: The quantitative impact of the adve
Page 15 and 16: Figure 2 gives an overview of the S
Page 17 and 18: 1.2.2 Work on other methodologies T
Page 19 and 20: Figure 4 Ratio of non-performing lo
Page 21 and 22: Chart 4 On-site inspections mainly
Page 23 and 24: The IT risk methodology was also re
Page 25 and 26: Based on the assessment methodology
Page 27 and 28: the year, JSTs actively monitored t
Page 29 and 30: frequency, duration and resources.
Page 31 and 32: Finally, the ongoing cooperation be
Page 33 and 34: 2 Authorisations, enforcement and s
Page 35 and 36: Annual assessment
Page 37 and 38: Table 5 Most authorisation procedur
Page 39 and 40: towards harmonisation by developing
Page 41 and 42: Chart 5 Enforcement and sanctioning
Page 43 and 44: 3 The SSM as part of European and g
Page 45 and 46: In 2016 the ECB in
Page 47 and 48: An ECB representat
Page 49 and 50: The Basel III reforms have not been
Page 51 and 52: Despite the significant efforts mad
Page 53 and 54: In the course of 2016 the E
Page 55 and 56: Supervisory Board Front row (from l
Page 57 and 58: Chart 8 Number of requests for revi
Page 59 and 60: Regarding gender diversity, the dis
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4.4 Implementation of the Code of C
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4.6 Data reporting framework and in
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• 1,295 public enquiries received
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supervisory fees (“the Fees Regul
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Total amount levied €404.5 millio
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More information on supervisory fee
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prudential purposes by national com
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Table 3a Composition of assets by r
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jurisdictions. Fit and proper asses
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SSM Regulation: the legal act creat
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ECB Annual Report on supervisory activities

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