The European Central Bank has been too loose in its oversight of the euro zone’s biggest banks, the EU’s external auditor said, as it called for greater assurances that “credit risks are properly managed and covered”.
Auditors have slammed the ECB for not being active enough in pushing euro zone banks to reduce high levels of non-performing loans.
Details on Friday criticism The European Court of Auditors also accused the ECB of being too slow and understaffed in deciding on capital requirements.
Banks on both sides of the Atlantic have come under heightened scrutiny in recent weeks after several U.S. banks collapsed and Credit Suisse was forced to rescue them.
The European auditor, which focuses on monitoring 10 banks with high levels of bad loans, said ECB officials were too hesitant to use their full powers and did so unevenly.
“Those with a higher proportion of non-performing loans have more time than others, and banks can choose the coverage method that is most beneficial to them,” the report said.
But the ECB responded that the process of processing such loans could not be “completed overnight without significant adverse effects on the overall economy”.
It insists it has finally met its target, as toxic debt has fallen steadily from more than 1 trillion euros eight years ago to below 350 billion euros last year, equivalent to less than 2% of total loans.
In response to criticism from auditors, ECB explain It will set banks’ capital requirements more quickly – a process the regulator found took 13 months from the end of the relevant reporting period.
It also pledged to address staff shortages that prevented it from carrying out a quarter of priority investigations into banks’ internal risk models and 10 percent of on-site inspections.
However, the central bank rejected some of those recommendations and said others had already been addressed since 2021, when a group of external auditors reviewed the central bank’s supervision of lenders.
It said its approach to setting banks’ capital requirements “ensures that all significant risks faced by institutions are properly covered”.
The ECB has been given the task of overseeing the most important euro zone banks following the banking collapse and sovereign debt crisis that engulfed the region more than a decade ago. This led to its establishment in 2014 of the Single Supervisory Mechanism as an independent unit for the central bank’s monetary policy operations.
“Our overall conclusion is that the ECB (has) stepped up its efforts to supervise banks’ credit risk, particularly non-performing loans,” the European Court of Auditors said in its 121-page report. “However, the ECB needs to do more work to strengthen assurances that credit risk is properly managed and covered.”
The auditors made three main recommendations to the ECB: simplify supervisory procedures, strengthen risk assessments for banks and take more effective steps to enable banks to better manage risk.
The central bank accepted the first recommendation, saying it was “considering ways to reduce” the time it takes to set banks’ capital requirements. But it only partially accepted the other two recommendations, rejecting calls for it to lift a hiring freeze it imposed this year on all existing ECB activities.
The ECB said it had added some staff to replace external advisers.
It will review next year whether a “more formal escalation process” is needed to push central banks to provide more staff to the joint team. The administration, which employs about 1,600 people, remains understaffed by 4 percent, the company said.
Some concerns have been addressed after last year’s review of its approach to assessing credit risk and the addition of an “independent supervisory risk function” as a second line of defense for setting banks’ capital requirements.