2023-12-19 09:19:12
ECB supervisory authorities continue to urge banks to be cautious
Thanks to the interest rate turnaround, banks are making more money once more. The ECB supervisory authority urges caution when dealing with profits.
May 24, 2023, Hesse, Frankfurt am Main: The building of the European Central Bank (ECB).
Photo: Sebastian Gollnow (Keystone)
The interest rate turnaround has brought good business to the banks. This also strengthens the buffers for times of crisis. But the environment remains uncertain.
The ECB banking supervisory authority is warning financial institutions to be cautious despite increased profits. Overall, the banking sector in the euro area will continue to be strong and resilient in 2023, the banking supervisors of the European Central Bank (ECB) reported on Tuesday. “However, the weak macroeconomic outlook and tightening financing conditions continue to represent a source of risk for European banks.”
From the supervisory perspective, the financial institutions’ resistance to external shocks has increased: “On average, the banks had solid capital and liquidity resources that were well above the regulatory requirements.” Profitability has returned to levels not seen in more than a decade.
Turnaround in interest rates helped banks
However, the rapid rise in interest rates contributed to this to a large extent. Many financial institutions are benefiting from the fact that the ECB has raised key interest rates ten times in a row since July 2022 because, for example, they earn from higher loan interest rates and receive interest once more when they park money with the ECB. “However, this effect will diminish if they pass on the higher interest rates to depositors,” the banking supervisors point out.
The ECB banking supervision regularly assesses, among other things, the viability of the business model and the risk management of banks in a “SREP” (“Supervisory Review and Evaluation Process”). As a result, the authorities set individual capital surcharges for banks and determine, among other things, how much money the institutions are allowed to pay out to their shareholders as dividends. Overall, the 2023 SREP capital requirements and recommendations increased from 15.1 percent to 15.5 percent compared to the previous year.
The ECB banking supervision was created in 2014 as a lesson from the banking and financial crisis. It currently directly monitors 109 financial institutions in the euro area, which represent 82 percent of the banking market in the currency area.
SDA
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