The European Central Bank announced on Tuesday that it had increased capital requirements for twenty banks, citing a lack of reserves for defaulted loans as a major reason for regulators’ concerns following a steep increase in borrowing prices.
The action was a component of the ECB’s campaign, which is expected to last into next year, to make sure banks are ready for a rise in bankruptcies and less liquidity following its hike in interest rates to combat excessive inflation.
The ECB said that it has imposed capital “add-ons” on 20 sizable banks due to their poor loans during the presentation of its annual assessment of the eurozone banking industry.
As is customary, the euro zone’s central bank and top banking supervisor stated, “In these cases, a shortfall was identified relative to the ECB’s coverage expectations,” without mentioning any specific lenders.
Given the poor state of the economy, it stated that there were already some early indications of asset quality degradation and cautioned that this could increase the stock of soured credit.
Due to the eight banks’ exposure to “leveraged finance,” or lending to borrowers who were already in debt, the ECB also levied capital charges on them.
Furthermore, it imposed an additional capital requirement on six banks and provided “guidance” to seven more for overleveraging their leverage or attempting to present an unduly optimistic financial picture.
Andrea Enria, the outgoing chief supervisor of the European Central Bank, stated during a press conference that “we focused on persistent, and in some cases long-standing, weaknesses in risk management, governance, and internal controls.”
UPCOMING YEAR
The European Central Bank (ECB) will continue to prioritize credit and liquidity concerns in 2024. This year’s crises at Credit Suisse and Silicon Valley Bank brought attention to the latter.
“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 European Central Bank stated.
Two banks have been instructed by the European Central Bank (ECB) to prolong their “survival period” this year, which is the number of days that their available cash and collateral can be used.
A foreign currency liquidity buffer was to be built by another bank.
Additionally, banks would be pushed to address their “shortcomings” in risk management connected to climate change, according to the ECB. With multiple intermediate deadlines, it gave them time to complete the task until the end of the next year.
“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),” said the ECB.
