Euro zone banks face new slate of risks, supervisor warns

Euro zone banks face new slate of risks, supervisor warns

Business

Euro zone banks face new slate of risks, supervisor warns

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FRANKFURT (Reuters) - Euro zone banks face a permanently changed risk landscape that requires lenders to alter how they operate, the European Central Bank's new top supervisor said in her inaugural speech on Monday.

Surging interest rates, rising geopolitical risk, quicker deposit movements, multiplying cyber attacks and climate risk are all changing the fundamental nature of the business, and lenders may not be sufficiently prepared, said Claudia Buch, who took over from Andrea Enria at the start of the year.

"Interest rates and energy prices have already increased, growth projections have been revised downwards, climate-related risks are becoming increasingly visible, and the number of cyber attacks has risen," said Buch, the former vice president of the Bundesbank.

"Many of these changes are structural rather than temporary," said Buch, who will now oversee just over 100 of the bloc's largest lenders.

The changed environment, including record fast rate hikes by the ECB, are already weighing on firms and there are "clear indicators" that asset quality is already starting to deteriorate.
A key problem is that banks do not yet have the expertise to work in such an environment, Buch warned.

"New risks are insufficiently integrated in banks’ risk management processes," Buch said. "Banks’ decisions may thus be based on flawed or incomplete information."

"Banks use a variety of approaches, many of which lack the required risk sensitivity," Buch said, adding that the ECB was re-running a review of compliance and expects banks to adhere to best practices on novel risks.

Increased digitalisation in the sector can also lead to a faster movements in deposits among distressed banks, as evidenced by stress among regional lenders in the U.S. last year, so the ECB must review banks' funding plans, Buch said.

She said reviews will look closely at governance and long-term thinking instead of just buffers, since many distressed banks in the past met regulatory norms until very late on.

Digitalisation also increases cyber risk and may lead to more competition among banks that could compress margins, reduce profitability and lead to excessive risk taking.