FRANKFURT (Reuters) -European Central Bank supervisors will zero in on bad loans this year after finding that some euro zone banks had set too little money aside for them or were slow in recognising the problem, the ECB said on Wednesday.
Presenting its annual review of the sector, the ECB said euro zone banks generally had more capital than required, and a profit boost from rising interest rates had offset the economic damage from the war in Ukraine.
But it warned this may not last.
“While rising interest rates are boosting banks’ profitability right now, they may also affect the ability of customers across a number of portfolios and business lines to pay back their debts,” the ECB’s top supervisor Andrea Enria said as he unveiled the results.
The ECB has already demanded more capital from 24 banks that “fell short of coverage expectations related to non‑performing loans”, inviting them to close that gap this year.
More generally, the ECB found “persisting risk control deficiencies”, particularly in how to classify loans that are at risk of going unpaid.
Earlier on Wednesday, France’s Societe Generale said it had raised its provisions for souring loans in the last quarter, resulting in a 35% decrease in profit from the same period a year earlier.
Enria also emphasised governance as an area of weakness for many banks, emphasising insufficient IT experience and independence among board members.
“The absence of a healthy challenge culture and the presence of weak decision-making procedures further hamper effective governance and strategic steering,” Enria said.
Overall, the ECB set its own capital requirement, known as Pillar 2, for banks at 1.1% of their risky assets, unchanged from last year.
Only one bank was below the ECB’s requirement and its so called capital “guidance”, which is not binding. There were six last year.
(Reporting By Francesco Canepa; Editing by Kevin Liffey and Christina Fincher)