“Cannot comment on individual banks. What I can tell you is that the banks that have experienced a major impact from the past crisis, and are still managing the legacy of that crisis, they have managed to make progress, not only in Italy, but also in Greece, Portugal, Spain and Ireland ”. Andrea Enria, number one of the ECB’s Banking Supervisory Council, responded to the question posed by Sky TG24 Business, on the possibility that the Italian banks most in crisis – Mps and Carige – were now considered out of danger.
Enria spoke yesterday during a press conference called to comment on the results of the Srep 2021 exams. Results that in recent days had already been communicated by various Italian institutes, such as UniCredit, Intesa SanPaolo, Banco BPM – the latter today observed special, the subject of rumors according to which it would have entered the crosshairs of UniCredit –there is talk of a takeover bid already at the weekend We believe.
Communications had been issued from these banks certifying how the capital requirements imposed by the ECB had been “Widely” exceeded.
In particular, in the case of Credem, it was found that the requirement of pillar 2 was placed among the best in Italy and in Europe among the main banks controlled directly by Frankfurt.
ECB asks banks for a marginal capital increase
“The situation is certainly much better than we feared just a year ago. The capital position of the banks has improved. While a year ago we feared the materialization of losses following the heavy recession that followed the pandemic – admitted Enria – Banks’ profitability rebounded to pre-crisis levelsit must be said that it remains structurally weak, but there has been a notable rebound ”.
That said, a warning was not lacking: “The impact of the pandemic, however, is not behind us and banks must be aware of the possible consequences for their balance sheets and in particular strengthen risk control and governance ”.
Also because there is a great challenge that banks have to face: the withdrawal of all those capital relief measures which had been launched at the onset of the pandemic.
In the press conference, Enria himself stated that “the capital buffer we have created for banks at the onset of the pandemic they helped them to continue to give credit to businesses and families, today we clearly indicate the path back to normality “.
In practice, these relief measures will be eliminated at the end of the year, taking away an important assist from the sector.
The ECB also asked euro area banks for 2022 “A marginal increase in the capital held”, as the press release states.
The Supervisory Authority has decided to slightly increase the overall capital requirements and guidelines, which are placed “on average around 15.1% of risk-weighted assets, compared to 14.9% of the pragmatic SREP 2020 assessment. On average, the overall capital requirements and guidelines in terms of CET1 went from 10.5% to around 10.6% of risk weighted assets “.
In this regard, “the marginal increase in total capital was determined by Pillar 2 requirements (P2R), which rose from 2.1% to 2.3%. This is mainly due to the introduction of a specific requirement (an additional requirement relating to provisioning deficiencies) imposed on banks that have not made sufficient provisions for credit risk on non-performing loans (NPLs) granted before the April 26, 2019 ″.
It was also specified that “banks that will actively address the shortcomings in their provisions compared to the expectations of the ECB will be able to rapidly reduce the new additional requirement during 2022 without having to wait for the next Srep assessment”.
About that “the second pillar capital guidelines (Pillar 2 guidance, P2G), which reflect the risks highlighted in the results of the stress tests, increased by 0.2 percentage points, from 1.4% to 1.6%. Only six banks did not comply with their respective P2Gs at the end of 2021, moreover for structural reasons prior to the pandemic ”.
With regard to the support measures provided at the beginning of the pandemic, the statement states that, “by virtue of the support measures of the ECB, banks can fully utilize their capital reserves or their P2Gs until the end of 2022. As announced with a specific press release, the ECB expects that by 1 January 2023 banks operate with capital levels higher than those defined by their respective P2Gs“.
Enria also issued a warning on the issue of NPLs, ergo of non-performing loans:
“The improvement that has been achieved in credit quality is remarkable. But we can’t let our guard down: the pandemic is not over and some sectors have been severely hit by the crisis “.
ECB on banks: profits still no higher than capital cost
And in the note, the ECB is firm on this point:
“The stock of NPLs continued to decline, thanks above all to the coherent implementation of the plans for the reduction and disposal of NPLs by the banks. Credit quality on bank balance sheets has remained fairly solid overall, partly as a result of the extraordinary public support measures. However, they are found some signs of deterioration in credit quality, in particular in the economic sectors that have benefited most from the support measures; these trends will have to be kept under careful observation “.
In general, Enria stressed that “we are substantially satisfied with how the banks have operated so far during the pandemic. They have contributed to the resilience of the euro area economy by continuing to provide credit to households and businesses. However, the impact of the pandemic on the economy has not yet worn off. Banks must remain aware of the possible consequences for their balance sheets and strengthen, in particular, risk control systems and governance arrangements “.
Other bank weaknesses illustrated:
“The results that emerged in terms of internal governance indicate weaknesses in the direction of the boards of directors and governance arrangements such as risk control systems. This can hinder the risk management function and the regulatory compliance function, as well as the IT transformation plans, preventing the resolution of data aggregation problems. Many banks also need to take measures to improve the composition and overall suitability of their management bodies, as they continue to fail to adequately value the issue of diversity (in terms of gender and professional skills, for example). With this in mind, the ECB uses operational measures to require banks to adopt diversity policies and set gender-related objectives “. Again: “at the same time, the assessment of business models highlights that most banks it still fails to generate profits above the cost of capital. Profitability recovered in 2021, but overall remains structurally low. In this context, the problematic aspects from the supervisory point of view mainly concern longstanding issues, prior to the pandemic, such as unsatisfactory strategic plans and / or their inadequate execution “.