In recent years, the European Central Bank has started disclosing its supervisory strategies for thecpming years . This is a very efficient mode of central bank communication as the financial system participants get timeto prepare and adapt to supervisory requirements. A few days back, the European Central Bank’s supervisory priorities for 2025-2027 was released. The document places focus on enhancing the resilience and risk management capabilities of European banks. These priorities are shaped by ongoing macroeconomic uncertainties, geopolitical tensions, and technological changes. The ECB highlights three overarching priorities:
Priority 1: Resilience to Macro-Financial and Geopolitical Shocks with a view to strengthen banks’ ability to withstand economic and geopolitical uncertainties.
ECB emphasises credit risk management practices to address shortcomings in identifying deteriorating asset quality and maintaining adequate provisions.
Operational Resilience: The regulatorybody aims to focus on cybersecurity, IT outsourcing management, and compliance with the Digital Operational Resilience Act (DORA).
Geopolitical Risks is rightly emphasised as the ECB plans to assess the impact of geopolitical shocks on risk frameworks, capital, and liquidity.
These aims are to be achieved through use of stress testing for geopolitical scenarios, reviews of provisioning models, cyber risk resilience, and operational risk controls.
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Priority 2: Remedying Material Shortcomings
Objective: Ensure banks address persistent deficiencies effectively.
Key Areas: The compliance records of a ks will be scrutinised and persistent deficiencies redolved. The Bank proposes Horizontal assessments of C&E risks and climate-related disclosures with the intention to align bank practices with supervisory expectations for managing C&E risks, including transition plans required under CRR3/CRD6.
Risk Data Aggregation will be scrutinised and Reporting improvements will be achieved to remediate deficiencies in risk data frameworks to ensure sound decision-making.
The third priority is to enable Digital Transformation and adoption of Emerging Technologies in Financial Institutions. To this end, ECB will proactively promote and enhance digitalisation strategies while managing associated risks.This is planned to be achieved through effective governance of digitalisation efforts, particularly around AI, cloud services, and IT infrastructure. The FS can expect Targeted reviews of digitalisation strategies as well as OSIs (on-site inspections) to assess risks stemming from advanced technologies ( thematic inspections of digitalisation strategies).
The plan mentions a set of additional Follow-Up Activities
Credit Risk Management: Monitor compliance with loan origination guidelines and real estate risk management.
Asset and Liability Management: Address liquidity planning and governance issues.
Governance: Improve management bodies’ suitability and accountability.
The ECB emphasizes flexibility in adapting its priorities based on emerging risks while urging banks to implement timely remediation measures for long-standing control weaknesses.
From an emerging market central bank perspective, this document is relevant as it touches many of the supervisory initiatives already underway at various jurisdictions. Emerging market supervisory bodies face additional challenges, including refining stress testing framework, embracing risk data analytics, suptech adoption and the strenthenin of financial infrastructure while ensuring consumer protection. To this end, supervisory priorities document from ECB is a good place to start. Effective communication from central bank has proven to deliver significant benefits to its licensees. It helps bank boards to decide on daunting IT overheads and software budget from a medium term perspective. It is very likely that central banks in emerging markets will follow suit and come up with their jurisdiction specific supervisory goals. ECB has historically given the lead in risk, compliance and governance directives and the recent effort is no different. We will surely witness more such disclosures of forward looking supervisory strategies from around the world. Sooner rather than later, I hope.
Here is a link to the Document : https://www.bankingsupervision.europa.eu/press/pr/date/2024/html/ssm.pr241217~8ca7d1d44e.en.html#:~:text=Today%20the%20ECB%20published%20the,ensuring%20banks%20tackle%20challenges%20stemming
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