01 April 2022

SSM's Andrea: Hearing at the European Parliament’s Economic and Monetary Affairs Committee

The war in Ukraine dominates our thoughts these days. The awful images of death and destruction close to our borders, in a country that had expressed its democratic wish to join the European Union, remind us of the core values driving European integration. The war triggered a second exogenous shock to our economy, and as a consequence to our banking sector, in less than two years. The international financial sanctions in response to the Russian aggression against Ukraine call for rigorous compliance by banks and other players, while generating challenges for multinational firms. The ECB is closely monitoring the impacts of current developments on the banking sector. We of course also remain committed to pursuing our supervisory priorities and to meeting our accountability obligations, and today we present you with our 2021 annual report on supervisory activities.

Banking sector preparedness for the impact of the Russia-Ukraine war

I would like to underline that the banking sector is well prepared for the impact of the Russia-Ukraine war, thanks to its strong capital and liquidity position.

Direct exposures of European banks to Russian counterparties appear manageable, which means the first-order impact on the euro area’s financial stability is contained. These exposures amount to approximately €100 billion, with sanctioned entities making up only a minor part of this total. Direct exposures are concentrated in a few banks operating in Russia, Ukraine or Belarus via subsidiaries that are predominantly locally funded. Even in the extreme scenario in which European banks were to write down cross-border exposures and decide or be forced to walk away from their establishments in the region, the overall capital impact would not jeopardise their continued compliance with supervisory requirements and buffers. The immediate consequence of the sanctions placed on Russia was a liquidity crisis at Sberbank Europe AG, whose ultimate majority shareholder is the Russian Federation. This led to our assessment of the bank and its subsidiaries in Croatia and Slovenia as failing or likely to fail. More recently, RCB Bank, which has Russian customers and is a former subsidiary of the Russian VTB Bank, decided to voluntarily phase out its banking operations and transform itself into a non-bank financial institution. A temporary administrator appointed by the ECB is working with management to oversee the orderly repayment of depositors, fully covered by the liquid assets available at the bank.

Regarding the implementation of the sanctions, ECB Banking Supervision does not have a mandate to assess and enforce banks’ adherence to the different regimes. Nevertheless, we are monitoring and evaluating the prudential implications of the sanctions very seriously. Effectively implementing the sanctions is a challenging task for banks, as they constantly need to adjust their operations to adapt to the multifaceted and evolving nature of the sanction framework. Our supervisory teams have daily exchanges with the banks to discuss the prudential implications of sanction regimes and to assess the measures taken. In particular, we are assessing whether banks have implemented adequate internal governance arrangements and controls to adhere to the sanctions. We are committed to a smooth cooperation with the industry and other European bodies to ensure clarity around the sanction framework.

Beyond the direct impact of the war, the ECB is also monitoring possible second-round effects on banks. At this stage, these indirect effects are more difficult to estimate. They could run through concentrated exposures towards sectors or individual customers indirectly hit by the sanctions, through the spike and volatility in energy and commodity markets, through heightened volatility in financial markets, and through the general deterioration of the macroeconomic outlook in the European Union. We are closely monitoring European banks’ risk profiles and are asking the banks to enhance their internal defences against cyberattacks and improve their operational resilience. We stand ready to implement swift supervisory actions should the risk situation of individual banks deteriorate....

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