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Today’s balance sheets are significantly strengthened since the Great Financial Crisis thanks to many decisions taken since then by global economic leadership and banking supervisors. In response to the coronavirus disruption, governments and central banks around the globe have been delivering liquidity, moratoria and public support measures of unprecedented magnitude and reach. ECB Banking Supervision and our counterparts in the EU, UK and US have announced unprecedented supervisory flexibility in response to the economic shock.
ECB Banking Supervision’s flexibility is reflected in a number of actions taken over the last few weeks and has several objectives.
First and foremost, our actions seek to alleviate the immediate operational burden on banks. This burden is not small. While protecting the health and safety of their employees and customers by moving in many cases to off-site working arrangements, banks also need to provide sustainable solutions for temporarily distressed debtors amid the current coronavirus outbreak. We want to enable banks to focus on the continuity of their core operations so that they can be part of the solution to this crisis.
Second, we are keenly aware of the wide variety of risks facing banks in this challenging macroeconomic environment. While the crisis is certain to cause economic damage, much is yet unknown about the depth and breadth of the harm. For now, we are striving to ensure that our actions today recognise uncertainties, are balanced and avoid procyclicality.
And, third, drawing on some of the most important lessons of the last crisis, we are keeping a firm hand on the supervisory tiller to avoid any hidden build-up of risks.
Here are a few examples of actions taken recently:
We have also asked the banks we supervise to take certain steps to be sure they are well prepared with enough fuel for the voyage ahead. In a move that was echoed by our UK counterparts, the ECB recommended that no capital leave the banking sector through dividend distributions or buybacks until we have a clearer picture of the consequences of the crisis. Policymakers are playing their part to ensure that banks are in a position to be reliable lenders to households, small businesses and large corporations alike in the weeks and months ahead.
However, our job is not yet done. In many ways, I think the role we will play in identifying risks in the system as the crisis unfolds will be just as important if not more so than the work we have done within European banking supervision in the last few weeks.
We are also considering carefully how best to extend our supervisory flexibility to the annual Supervisory Review and Evaluation Process (SREP). Our deliberations about how to strike the right flexible balance for this cornerstone of our supervisory work have been extensive and reflective of the importance SREP has in enabling us to understand the state of the banks under our supervision.
The SREP involves a comprehensive review of the sustainability of a bank’s business model, the effectiveness and quality of its internal governance, and the risks and control measures for managing its capital and liquidity positions. The annual SREP process is an intensive exercise for both supervisors and banks, requiring the management board and the risk functions of each bank to provide a broad range of information, for example through internal capital and internal liquidity adequacy assessment processes (known as ICAAP and ILAAP, respectively) in line with EBA guidelines.
We need to be pragmatic and take a simplified approach this year. At the same time, we very much need to continue to assess the health of the banks in a relevant, rigorous and transparent manner.
The ECB Supervisory Board took note of the main features for conducting a pragmatic SREP in 2020 at its meeting on 27 March. The SREP 2020 will:
At the time of writing this blog post, we are still refining aspects of the SREP assessment in 2020. For example, we are working closely with the EBA as it coordinates a European approach on a simplified joint decision-making process for the SREP in 2020. We are also coordinating with the relevant competent authorities for banks operating in countries outside the European Union.
In short, our guiding objective is to reduce the burden on euro area banks while maintaining a clear and accurate view of their soundness. We are currently working to ensure that we deliver a SREP that is pragmatic while meeting our objectives for rigor, relevance and transparency.
As the coronavirus crisis unfolds, ECB Banking Supervision will continue to be flexible and vigilant, keeping a weather eye on the horizon for potential build-up of risk using tools such as a pragmatic SREP and other supervisory assessments.
We need a strong banking system that can support the economy through this crisis, and we look forward to the day we enter “new” normal times, when ECB Banking Supervision can return to normal supervision.