The European Central Bank has “flaws” in its procedures for identifying and dealing with banks in crisis, European Union auditors said.
The European Court of Auditors, a European Union agency, cast doubt on the ECB’s supervision of the big banks in the euro zone and criticized the central bank’s reluctance to disclose relevant information. But it stopped short of saying the flaws could have an impact on the way an actual crisis was addressed.
After the 2007-08 global financial crisis, the ECB has added to its monetary policy functions the task of supervising the top banks of the euro zone’s 19 countries. It oversees around 120 banks that hold over 80 percent of the bloc’s banking assets.
The ECB’s supervisory unit the Single Supervisory Mechanism (SSM), chaired by French regulator Daniele Nouy has sweeping powers to spot and tackle emerging troubles at individual banks. But it lacks sufficient guidelines to exercise those powers, EU auditors said in a report published.
“The ECB’s operational framework for crisis management has some flaws and there are some signs of inefficient implementation,” the auditors said.
In their report, the auditors found “deficiencies” in the procedures the ECB use to identify potential banking troubles at an early stage and in how it would respond to a crisis. The ECB said some concerns raised by auditors had been addressed after the audit was concluded in June.
The SSM has dealt since it was established in 2014 with lingering troubles at euro zone banks caused by lower profits, an overcrowded market and a mass of bad loans, mostly in southern Europe.
Auditors said the ECB would need to gather information quickly when a bank showed signs of distress, but it “has limited available on-site inspection teams to carry out a detailed analysis of asset quality for crisis banks.”
They also said the central bank had not developed proper guidance on how to assess emerging risks and use its powers in a crisis. The lack of guidance could allow an excessive discretion in taking key decisions.
“The latest guidance, which was produced in September 2017, was not taken into account during the audit process and addresses the concerns raised by the ECA,” the ECB said in replies included in the ECA report.