ECB prepares banks for a changing risk landscape

Eurozone banks must revise their risk management strategies in light of several challenges, according to Claudia Buch, the European Central Bank’s top bank supervisor, Reuters reported on Thursday.

These challenges include the end of ultra-low interest rates and the rise of non-traditional competitors capable of quickly capturing market share.

Despite the recent inflation and interest rate surge, Eurozone banks have demonstrated remarkable resilience, largely avoiding the banking turbulence experienced in the US and Switzerland last year.

However, this has led to concerns about complacency and calls for banks to brace for tougher times ahead.

Buch noted that while loan losses have remained exceptionally low in a near-recessionary environment, this could be attributed to unprecedented fiscal and monetary support that has insulated banks from shocks.

She warned that past data on loan defaults may not accurately reflect future asset quality risks.

Banks are also advised to prepare for risks associated with cyberattacks, climate change, and geopolitical shifts, all of which could significantly impact their long-term business models.

The advent of innovation, such as the broader use of distributed ledger technology and artificial intelligence, has lowered entry barriers for competitors, including shadow banks.

This could potentially compress margins and compel banks to undertake undue risks.

Buch cautioned that while innovation and increased competition can enhance economic welfare, they also introduce new risks. If banks find their margins under pressure, they may resort to potentially riskier activities.