Over the past few years, the ECB (European Central Bank) has asked banks to change their priorities, to double their equity capital and, above all, to get rid of several hundred billion euros in unpaid loans. Even if this balance sheet has now been partly corrected, it is not enough, and the ECB is pointing the finger at an unfinished business: governance and internal risk controls.
Risks in the banking sector
Once again, the ECB is pounding its fist on the table, as it has identified numerous shortcomings leading to new capital requirements and several weaknesses in the internal control functions of risk management.
In practical terms, a bank's core business is to lend money in return for a form of remuneration, namely interest. This entails the risk of non-repayment of the loan and its interest. In this way, banks seek to control the risks they wish to take, but also to limit the risks for which they expect no remuneration.
ECB targets 6 European banks
While the ECB has decided to monitor banks' balance sheets in order to identify possible defaults, it focuses each year on the situation of European banks in terms of capital requirements, capital management and risks, through the Supervisory Review and EvaluationProcess ( Srep).
However, as the ECB recently pointed out, most European banks have a solidity coefficient, known as Cet1, which is higher than the overall requirements. However, 6 of the 109 banks included in the Srep 2019 cycle have Cet1 levels below the requirements. The ECB has therefore decided to draw attention to this shortcoming.
Considering that these 6 banks have not taken the necessary and satisfactory measures during the last quarter of 2019, the ECB has simply sent them a letter in which it requests actions to be implemented very quickly in order to correct this score. It should be noted that the names of these 6 banking institutions have not been revealed. To date, four of these banks have managed to absorb the deficit by the end of the 2019 financial year, but two still need to adopt efficient measures within a defined timeframe.
Keep a close eye on the risks taken by banks
Not only is capital management not always up to scratch for certain establishments, but the ECB was also keen to point out that controls and procedures to prevent money laundering are inadequate. The same applies to cybersecurity, which remains an area where banks need to make a real effort.
This exercise in the regulation and supervision of European banks enables the ECB to compare the performance of individual institutions. For French banks a fortiori, capital requirements range from 1.25% for BNP Paribas to 3% for HSBC France, via 1.5% for Crédit Agricole, 1.75% for BPCE and CNCM, and 2% for Banque Postale.