The European Central Bank (ECB) published its annual report on supervisory activities in March. It provides useful insight into the 2016 priorities and workings of the ECB as a supervisor. The report summarizes the ECB’s supervisory priorities and acknowledges that the key priorities are unlikely to be fully addressed within one year and will remain on the list in future years.
The report confirms that the biggest Banking Union challenge is business model and profitability risk at significant institutions – return on equity (RoE) was 4.6 percent on average in 2015. The EBA’s most recent estimate of EU banks’ cost of equity was 9.15 percent1. The ECB reiterated its message that the large amount of non-performing loans (NPLs) is clearly dragging RoE down and impairs bank’s abilities to generate capital. One of the keys to addressing this is to proactively address NPLs. The supervisory pressure to develop a profitable strategy is likely to lead to loan disposals as banks exit less profitable lines and enter core profitable markets. Of course, this raises capital management issues.
The SSM’s three special initiatives of 2015: Options and National Discretions; the Supervisory Review and Evaluation Process (SREP); and Non-Performing Loans remain on the agenda for 2016. Of note, the rules for Options and National Discretions came into force in March 2016.
Besides the aforementioned and already well known strategic stance of the ECB, the report outlines some interesting details on supervisory activities and organizational design:
For those seeking a better understanding of the mechanics of the Single Supervisory Mechanism (SSM), the report (PDF 1.68 MB) is essential reading.
1Risk assessment of the European Banking System, December 2015, EBA publication.