Financial institutions in the euro area have been warned by the European Central Bank (ECB) to remain vigilant amid an unsafe environment. Claudia Buch, head of banking supervision at the ECB, emphasized that while banks are better capitalized and more resilient than they were ten years ago, complacency is not an option. Structural changes in the real economy, emerging risks, digitalization, and increased competition are some of the factors that could challenge banks’ business models.
Buch also pointed out that there are signs that the quality of assets of major institutions is beginning to deteriorate, with an increase in loans at risk of default. The ECB banking supervision monitors 113 banks in the euro area, representing 82 percent of the banking market in the currency area, to ensure more stability in the financial system with uniform rules for the largest financial institutions.
The warning comes as banks have recently benefited from increased interest rates and higher profits, providing them with an opportunity to increase their resilience by building capital buffers and stable IT infrastructures. Credit risk supervision has also focused on “vulnerable sectors” such as commercial real estate.
The ECB banking supervision was established in 2014 to ensure more stability in the financial system with uniform rules for the largest financial institutions in the euro area after the banking and financial crisis.