14 June 2022

SSM's Elizabeth McCaul at Global ABS Confererence: Supervisory priorities and securitisation

After almost two years of pandemic and lockdown measures, the outlook for the European banking system was quite bright at the end of last year. Capital and liquidity positions were strong, and banks’ asset quality and profitability improved over the course of 2021.

I would first like to start by looking at the current state of the banking sector. After that, I would like to discuss how our supervisory priorities which we spelled out last year not only remain valid but are now more relevant than ever given current developments. I will conclude by reflecting on the role of securitisation in Europe’s financial architecture.

State of the banking sector

The war in Ukraine is on all of our minds. Before I talk about its impact on the European banking system, I think it’s important first to express our continued support for the people of Ukraine as they pursue their right to freedom and sovereignty. The war has brought about historic unity for Europe. We pray for peace.

While the war has changed the dynamics going forward, let’s first appreciate the underlying fundamentals as we brace for some headwinds. After almost two years of pandemic and lockdown measures, the outlook for the European banking system was quite bright at the end of last year. Capital and liquidity positions were strong, and banks’ asset quality and profitability improved over the course of 2021.

The average ratio of non-performing loans at our supervised banks has continued to decline, reaching 2.06% in the last quarter of 2021, and the return on equity rose to 6.72%, the highest level in five years (on an end-of-year basis).

The Russian invasion of Ukraine in February 2022 has repeatedly been described as a watershed moment for Europe. Its impact on the European banking sector cannot be ignored either.

That said, the banking sector’s direct exposures to Russia and Ukraine are limited. Banks active in these markets are already containing local banking activities and are in the process of unwinding their positions. Even in a scenario where European banks had to write down all their cross-border exposures to these countries or had to “walk away” from their subsidiaries in Russia, the losses generally seem to be manageable.

While the direct impact of Russian’s invasion of Ukraine appears to be contained, some near- to medium-term risks have risen. Above all, these include a worsened macroeconomic outlook, the indirect effects of elevated commodity prices, combined with supply-chain disruptions, including on food supply, and concerns about increased corporate and household credit risks as well as heightened volatility in financial markets.

So, what does this mean for our supervisory priorities?

Banking supervision in times of uncertainty

Every year we publish our supervisory priorities, which set out what we see as the most important supervisory focal points and activities for the next three years.

When confronted with a geopolitical shock such as the Russian invasion of Ukraine, it was only natural for us to consider the impact on our supervisory priorities for 2022-2024. However, when we took a closer look at them, we realised that they are not only still valid but potentially even more relevant than before.

Let me walk you through these priorities...

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