The European Central Bank said today it had raised capital requirements for 20 banks after judging they had not set aside enough cash to cover for loans that had gone unpaid, a key concern for supervisors at a time of high borrowing costs.
The move was part of the ECB’s push, set to continue next year, to ensure banks were making enough provisions for a possible rise in delinquencies after a surge in interest rates and ensuing slowdown in economic growth.
Presenting its annual evaluation of the euro zone banking sector, the ECB said it had slapped capital “add-ons” on 20 large banks over their non-performing exposure (NPE) – financial jargon for bad loans.
“In these cases, a shortfall was identified relative to the ECB’s coverage expectations, as the cover for risks arising from aged NPEs was assessed to be inadequate,” the ECB said, without naming any bank, as is its policy.
In 2024, the ECB will keep its focus on credit and liquidity risks, the latter of which was thrown in the spotlight by some high-profile banking crises outside the euro zone earlier this year.
“The higher interest rate environment is expected to increase both the volatility of some funding sources and banks’ funding costs in the medium term, just when substantial amounts of central bank funding are to be replaced,” the euro zone’s top supervisor said.
It added that there were already some early signs of asset quality deterioration given the weak economic environment and this could boost the stock of soured loans.
In addition banks will be urged to remediate their “shortcomings” in the management of climate-related risks, the ECB said. It gave time to do so until the end of next year, 2024, with several interim deadlines in the meantime.
“To support this objective, ECB Banking Supervision stands ready to make use of the tools at its disposal (including, when needed, capital add-ons, enforcement and sanctions and reviews of fit and proper assessments),” it added.