EU supervision of banks' credit risk : the ECB stepped up its efforts but more is needed to increase assurance that credit risk is properly managed and covered; Special report 12, 2023

The European Central Bank (ECB) supervises large banks in the Banking Union, assessing their prudential risks. This includes credit risk, which is when loans become non performing and threaten the viability of banks and sometimes the whole financial system. We found that while the ECB has stepped up its efforts, more needs to be done for the ECB to gain increased assurance that credit risk is properly managed and covered by banks. Its new methodology for determining additional capital requirements (pillar 2) does not provide assurance that individual risks are fully covered, and has been inconsistently applied: higher-risk banks did not receive proportionally higher capital requirements. The ECB made inefficient use of its existing tools and supervisory powers to ensure appropriate coverage of banks' credit risk. We recommend strengthening risk assessments, streamlining the supervisory review and evaluation process, and applying better supervisory measures to manage risks effectively. ECA special report pursuant to Article 287(4), second subparagraph, TFEU.