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Eurozone banks that drag their feet and falter to comply with requests from supervisors to fix vulnerabilities will face tougher enforcement action including more fines, a top European Central Bank official has warned.
Frank Elderson, vice-chair of the ECB’s supervisory board, said in a speech on Thursday that it is shifting to a more aggressive approach for banks that do not reply fast enough to supervisory pressure.
The turmoil in banking markets this year, which led to the collapse of several US banks and the forced rescue of Credit Suisse in March, “was a clear reminder of what can happen if issues are detected but not acted upon”, Elderson said. “This episode confirms that intrusive and effective supervision is needed more than ever.”
The ECB has had a relatively cautious stance on imposing sanctions on banks for transgressions of its rules since starting to supervise the eurozone’s biggest lenders a decade ago, imposing much smaller fines than authorities in the US or UK.
Promising to bare its teeth more, Elderson said the ECB was ready to make greater use of “supervisory escalation”, as it did recently by warning 20 banks that it will impose daily fines if they do not start to evaluate and tackle climate risks soon.
He gave the example of banks that have failed to face the ECB’s March deadline to evaluate the risks from climate change in their balance sheets. More than 20 of these banks have received letters in the past two months warning that if they don’t cure this by a set deadline they will have to pay daily fines that could enhance after a certain time.
“I admit that this is a tool that we have not used very often,” Elderson said about the power to impose periodic penalty payments on lenders worth up to 5 per cent of their average daily turnover every day for up to six months.
“It is a step that we do not take lightly,” he added. “It is not about forcing banks to do something that is merely nice to have. It is about compelling banks to supervise material financial risks adequately and in a timely manner.”
His comments come at a significant point for the ECB’s supervisory arm, with Andrea Enria set to hand over as its chair to Claudia Buch, deputy head of Germany’s central bank, at the end of this year.
The ECB has become increasingly frustrated with banks’ reluctance to tackle climate change risks. Elderson said several lenders had not carried out an adequate materiality assessment of climate risks in their portfolios, “which is the basic starting point for managing any type of risk”. All banks that have done so have found material risks.
Elderson outlined a number of other areas where banks “have been dragging their feet”, indicating it may take a similarly tough approach, such as weaknesses in internal governance, data aggregation and reporting, risk management and business model sustainability.
The ECB has never imposed periodic penalty payments on a bank, as those it threatened with them have always complied with its demands within the necessary timeframe.
The Frankfurt-based bank can also impose sanctions for one-off breaches and has levied €59mn of these since 2017, the biggest of which was an €8.7mn fine for Italy’s Banca Popolare di Vicenza. But that is dwarfed by the more than £320mn of penalties imposed by the Bank of England in the same period. The US Federal Reserve regularly hands out even bigger sanctions, such as its $186mn fine for Deutsche Bank this year.
Elderson said a group of five experts that carried out an independent review of its supervisory activities this year “recommended that the ECB should establish more timely and forceful escalation processes, leveraging on the full range of supervisory tools”.
“Having progressed from a start-up to a mature supervisor, we must now focus more systematically on which tools we use and under what circumstances,” he added.
