ECB Annual Report on supervisory activities

Speaking of banks, how are the European banks doing?
Well, the good news is that they have become much more resilient over the past few
years; their capital buffers have increased significantly. At the same time, however,
they still face risks and challenges. Besides having to work out how they can raise
profits in a challenging environment, how they can dispose of legacy assets and how
they should deal with cybercrime and other IT risks, they currently face a number of
other questions. Will competition from non-banks intensify? Where is the euro area
economy headed? How will Brexit affect banks in the euro area? How will other
geopolitical issues play out? Banks are operating in a world characterised by risk
and change; they have to manage these risks and adjust to the change. Only then
will they be able to remain profitable over the long term.
Low interest rates and stronger regulation are often named as
particular challenges for banks. What is your view?
For large banks in the euro area, interest income makes up more than half of their
total income. So interest rates are indeed an issue and low interest rates are a
challenge. In 2017 we will further explore banks’ interest rate risk. For instance, this
year’s stress test will consist of a sensitivity analysis focused on effects of interest
rate changes on the banking book. Regarding regulation, rules invariably impose a
burden on those who have to comply. But we have to look beyond the banks in this
case. Stronger rules help to prevent crises. And we have learnt that financial crises
are costly to the economy, to taxpayers and, ultimately, to the banks themselves.
Against that backdrop, it would be most welcome if the global regulatory reform were
to be finalised as foreseen. Walking back on the global regulatory reform is the last
thing we should do. The financial sector transcends national borders, and so must
the rules that govern it – that is a major lesson from the financial crisis.
How does banking supervision address the challenges banks are
facing?
The risks and challenges I just mentioned are reflected in our supervisory priorities
for 2017. First of all, we will further analyse banks’ business models and go on
exploring their profitability drivers. To that end, our Joint Supervisory Teams will
thoroughly examine their respective banks. And we will also assess how
developments such as FinTech and Brexit might impact the business models of
banks in the euro area. However, at the end of the day, it is of course not our job to
prescribe new business models. But we can and will challenge the existing ones.
Our second priority is risk management. In the current environment of low profitability
and high liquidity, banks might be tempted to embark on a dangerous search for
yield. In that context, risk management is more important than ever. And our third
priority is credit risk. This mainly refers to non-performing loans – I already
mentioned this important issue.
<strong>ECB</strong> <strong>Annual</strong> <strong>Report</strong> on supervisory activities 2016 − Introductory interview with Danièle
Nouy, Chair of the Supervisory Board 6