Financial institutions in the euro area have been issued a warning by the European Central Bank (ECB) banking supervision to remain vigilant in an unsafe environment. Claudia Buch, head of banking supervision at the ECB, emphasized that while banks are better capitalized and more resilient than they were ten years ago, there is no room for complacency. She pointed to structural changes in the real economy, emerging risks, digitalization, and increased competition as factors that could challenge banks’ business models.
The ECB banking supervision monitors 113 banks in the euro area, representing 82 percent of the banking market in the currency area. The warning comes as banks have recently benefited from increased interest rates and higher profits, providing them with an opportunity to increase their resilience by building capital buffers and stable IT infrastructures. Credit risk supervision has also focused on “vulnerable sectors” such as commercial real estate.
In response to the warning, banks are urged to take proactive measures to mitigate risks and maintain a healthy balance sheet. The ECB banking supervision was established in 2014 in response to the banking and financial crisis, with the aim of ensuring more stability in the financial system with uniform rules for the largest financial institutions in the euro area.