European Banks: Supervisory Priorities, Risks and Vulnerabilities

The Single Supervisory Mechanism (SSM), a key pillar of the European banking union, released its supervisory priorities for the period 2023-2025 based on key risks and vulnerabilities that supervised institutions face in the current economic, regulatory and supervisory environment. The SSM purpose is to ensure enhanced supervision of Europe's banking sector to contribute to financial stability and financial integration of the euro area and the single market as a whole. The SSM is composed of the European Central Bank (ECB) and the national supervisory authorities of the participating EU member states.

SSM´s supervisory priorities for the period 2023-2025:

• Strengthening resilience to immediate macro-financial and geopolitical shocks: Supervised entities need to develop sound and credible capital, liquidity and funding plans that take into account the current uncertain outlook and being ready to adjust them to the evolving risk landscape in a flexible and timely manner. Entities will need to tackle:
  
  
  • Vulnerabilities in credit risk management, including exposures to vulnerable sectors most impacted by current macroeconomic and geopolitical conditions such as: energy intensive and gas consumer sectors such as producers of metals, chemicals, food and beverages, construction sector, variable interest rates mortgages…).
    
    
  • Deficiencies in funding plans and lack of diversification in funding sources. In this regard the SSM will review TLTRO III exit strategies for selected banks which have a material reliance on this funding source and are more vulnerable to increases in market funding costs.
    
    
• Addressing digitalisation challenges and strengthening management bodies’ steering capabilities: To that end entities will need:
  
  
  • To tackle vulnerabilities and risks stemming from a greater operational reliance on IT systems, third-party services and innovative technologies. In this regard, banks should develop and execute sound digital transformation plans and they should have robust outsourcing risk arrangements as well as IT security and cyber resilience frameworks.
    
    
  • To improve governance and boards members and management suitability, including adequate collective knowledge, skills and experience (focus on IT/cyber risk), and the diversity of banks’ management bodies and to tackle deficiencies in risk data aggregation and reporting.
    
    
• Stepping up efforts in addressing climate change: Banks should adequately incorporate urgently climate-related and environmental risks and opportunities within their business strategy and their governance and risk management frameworks in order to mitigate and disclose material exposures to physical and transition risk drivers.