ECB Annual Report on supervisory activities

Non-performing loans have indeed been a big issue in 2016. What is
the current state of play?
Banks and supervisors have certainly accomplished much already. Nonetheless,
non-performing loans, or NPLs, remain a big issue. They are like dead weight in
banks’ balance sheets: they curb profits, and they limit the capacity of banks to
extend credit to the economy. The guidance we devised will help banks to clean up
their balance sheets. It fosters consistent forbearance, recognition, provisioning and
disclosure for NPLs. And it urges banks with high levels of NPLs to define and
implement specific reduction targets. The best practices defined by the guidance
constitute our supervisory expectations. Our Joint Supervisory Teams have already
started to actively engage with banks on how they plan to implement the guidance.
But the issue of NPLs is not just one for banks and their supervisors. How quickly a
bank can resolve its NPLs also depends on the national legal and judicial systems.
And in some countries, these systems hamper the speedy resolution of NPLs. Here,
national policymakers could help the banks. They could make judicial systems more
efficient, increase access to collateral, create fast out-of-court procedures and align
fiscal incentives.
You mentioned risk management as one of your priorities for 2017.
What is behind that?
It is clear that banks always and everywhere need sound risk management – after
all, they are in the business of taking and allocating risks. But sound risk
management is complex, and it requires a number of elements. First of all, it requires
the right culture – a culture where risk management is valued and not seen as a
roadblock on the way to higher profits. More formally, sound risk management
requires sound governance structures – risk managers must be given a voice that is
heard by those who take decisions. In June 2016 we published the results of a
related review which showed that many banks still need to improve in this regard.
Finally, sound risk management requires good data. That is why in 2017 we will
assess how banks comply with relevant international standards. As a related issue,
we have launched a major project to assess the internal models that banks use to
determine their risk-weighted assets. These internal models are important because
risk-weighted assets form the basis for calculating capital requirements. And finally,
we will initiate a thematic review to take stock of banks’ outsourced activities and
scrutinise how they are managing the associated risks.
Looking further ahead, what is your vision for European banking
supervision? How does it serve both the public and the banks?
For banks, supervision is like a counterweight that improves stability: banks tend to
see the returns, supervisors tend to see the risks; banks tend to care about
profitability, supervisors tend to care about stability. By playing their role, banking
supervisors prevent banks from excessive risk-taking, thereby helping to prevent
future crises. They protect savers, investors, taxpayers and the entire economy.
<strong>ECB</strong> <strong>Annual</strong> <strong>Report</strong> on supervisory activities 2016 − Introductory interview with Danièle
Nouy, Chair of the Supervisory Board 7