The European Central Bank supervises more than 100 of the largest banks in the euro area, and often complains that banks do not take the risks posed by bad debt seriously, fail to spot problems or avoid provisioning as part of precautionary measures. .
But Friday’s report indicates that the problem is more systemic than banks’ non-compliance.
The report concluded that the ECB does not apply its rules consistently, tolerates higher-risk banks, takes too long to make capital decisions, and does not always have enough supervisory staff to carry out the tasks assigned to them.
The report by the Court of Auditors finds that “the ECB did not impose proportionately higher capital requirements when banks faced greater risk meaning that the risk is not clearly linked to the requirements imposed”.
“For the higher-risk banks, the ECB has consistently chosen requirements at the lower end of pre-established ranges,” the report added, noting that the ECB has, constitutively, failed to escalate controls sufficiently when credit risks rise and remain high.
The report also showed that this practice made banks with lower risks have more stringent capital requirements than banks with higher risks.
The report is the first since the European Central Bank agreed in 2019 to provide sensitive data on specific banks for audit and oversight purposes, but the report’s recommendations are not binding.
In its response to the report, the ECB primarily defended its practices but also acknowledged problems.
“The European Central Bank believes that its current methodology for determining additional capital requirements ensures that all real risks to which a financial institution may be exposed are appropriately covered,” he said.
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