From the perspective of the top ECB banking supervisor, Claudia Buch, financial institutions in the euro area must prepare for greater economic, climate and geopolitical risks. Interest rates and energy prices have already risen, Buch said in her first major speech as the new ECB chief banking watchdog on Monday in Brussels, according to the text of the speech.

The growth forecasts have already been lowered, climate-related risks are becoming increasingly visible and the number of cyber attacks has increased. “Many of these changes are structural rather than temporary and require adjustments at the company and industry level,” she continued. Company bankruptcies and credit risks could increase, and highly indebted borrowers with weak business models could come under pressure, she warned.

Until the end of 2022, there was an almost continuous downward trend in the rate of loans that were no longer being serviced (“non-performing loans”/NPL). Since 2023, these loans at risk of default have increased slightly again, although they remain at a low level. Recently, credit risk supervision has focused on “vulnerable sectors” such as commercial real estate.

Moderate increase in bad loans

The former Bundesbank Vice President has been in charge of ECB banking supervision since the beginning of the year. The new risks are currently not sufficiently taken into account in the risk management processes of financial institutions, said Buch. “Banks' decisions could therefore be based on incorrect or incomplete information.” The ECB is currently monitoring around 110 major banks from the euro zone, including Deutsche Bank and Commerzbank in Germany.

There are signs that the quality of major banks' assets is beginning to deteriorate, Buch said. The number of bad loans has increased moderately again since 2023, even if they remain at a low level. Banks used a variety of approaches to deal with the new risks. But many of them would not meet these risks. The supervisory authority has therefore demanded improvements and is now re-initiating inspections to ensure compliance with the requirements, said Buch.

The German economist also pointed out the increasing digitalization of the banking sector. According to Buch, this can also lead to deposits being withdrawn from accounts much more quickly than before when banks come under pressure. She referred to the regional bank crisis in the USA in spring 2023. “We will therefore concentrate on the financing and liquidity risks in this new environment, including through targeted reviews of financing plans,” she announced. The Silicon Valley Bank (SVB) and several other US financial institutions collapsed in 2023 as a result of the crisis. Back then, customers had withdrawn billions of funds from their accounts within a short period of time.

The ECB banking supervision was created in 2014 as a lesson from the banking and financial crisis. According to the latest information, the ECB banking supervisory authority directly monitors 113 banks in the euro area, which represent 82 percent of the banking market in the currency area. The aim is to ensure more stability in the financial system with uniform rules for the largest financial institutions in the euro area.