ECB highlights credit risk as priority concern

The European Central Bank’s Single Supervisory Mechanism (SSM) on Monday announced its intention to focus on credit risk provisions and, more broadly, new lending procedures, due to the deterioration of the macroeconomic environment and high inflation, partly fueled by the war in Ukraine.

The SSM published today its supervisory priorities for the period between 2023 and 2025, indicating the areas to which it will pay special attention, in the context of the control of the banks under its supervision.

It should be noted that the Bank of Cyprus and Hellenic Bank are the two Cypriot banks under the direct supervision of the Single Supervisory Mechanism, following the revocation of RCB’s banking license.

According to the SSM, as “a result of high inflation and the fallout from Russia’s war in Ukraine, the outlook for economic growth has deteriorated significantly”.

Moreover, following the increase in interest rates by Central Banks including the ECB, the combination of tighter funding conditions in the wake of higher interest rates, and the worsening outlook for economic growth, are all expected to further hamper the ability to fulfil lending obligations.

In addition, according to the SSM, higher financing costs, as well as increased operating costs, can lead to higher default rates by businesses, especially those more exposed to soaring energy prices.

At the same time, households with high levels of debt, lower incomes or those with variable-rate mortgages may face worsening repayment capacity in the future.

“Supervised entities should be prudent in developing and planning their business strategies so that they continue to closely monitor the risks associated with the rapidly changing environment and focus their efforts on risk management,” the SSM stated.

What is more, the SSM said that banks should effectively correct their structural weaknesses in the credit risk management cycle, from granting a loan, to mitigating risk and monitoring it, and promptly address any deviations from regulatory requirements and supervisory expectations.

The SSM noted that the stress tests that are scheduled to be carried out by the European Banking Authority in 2023 will be included in the cycle of the supervisory examination and evaluation process (SREP) carried out by the SSM.