Dealing with persisting and emerging issues: banking on resilience
The aggregated results of the 2022 Supervisory Review and Evaluation Process (SREP) cycle showed some positive developments but also pointed out the need to ensure resilience and adaptability further. In order to come to this conclusion, the following three key questions had to be answered:
- How did banks weather the extraordinary changes in the economic environment?
- What pain points continue to exist?
- What are the emerging issues that could compromise the current resilience?
On the positive side, it was noticed that most of the banks reported Common Equity Tier 1 (CET1) ratios above the new requirements and guidance stemming from the previous SREP cycle. Also, the asset quality improved further, and non-performing loans (NPLs) were reduced to their lowest level since supervisory data were first published in 2015.
In terms of weaknesses, ECB mentions banks' internal governance and risk management. While banks are aware of the importance of risk data aggregation and reporting, there is still room for improvement. The business model score didn't improve in the 2022 SREP cycle. Banks should rethink their strategies to create a sustainable source of revenue and adapt to upcoming changes. Refocusing business models and digital transformation might help in achieving the necessary goals. Besides the weaknesses mentioned above, there are also two emerging structural challenges: digitalization and climate change, that banks need to face.
Cyberattacks and IT risks are constant challenges that banks must assess carefully. ECB Banking Supervision has launched several digitalization-related initiatives, which will feed into the supervisory assessment in the next SREP cycle.
In addition to evaluating climate risk through qualitative measures in the areas of governance and business models, and to some extent credit, market, and operational risks, banks are required to improve their identification, assessment, management, and transparent disclosure of their exposures to climate-related and environmental risks. To meet these requirements, supervisors have requested banks to take specific actions to ensure compliance by the end of 2024.
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RBI Regulatory Advisory
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