The European Central Bank’s top supervisor stated that eurozone banks must change their risk management strategies as they confront difficulties ranging from the end of ultra-low interest rates to the advent of non-traditional competitors who can quickly take market share.
Eurozone banks handled the recent spike in inflation and interest rates with remarkable ease, notably avoiding last year’s banking upheaval in the United States and Switzerland, heightening the risk of complacency and fueling calls for lenders to prepare for more challenging times.
Loan losses have been extremely low despite a near-recessionary climate, but this could be attributed to the historic fiscal and monetary support that has sheltered banks from shocks, according to Claudia Buch, the ECB’s top bank regulator, on Thursday.
“This has implications for future risk assessments, as past data on loan defaults do not truly reflect the risks to asset quality that lay ahead,” Buch said in the bank’s annual report of supervision.
Lenders must also better prepare for the risks of cyber assaults, climate change, and geopolitical developments, all of which have the potential to profoundly disrupt their long-term business models.
“It is therefore crucial that banks adjust their risk management practices to the new environment,” added Buch.
Innovation, such as increased usage of distributed ledger technology and artificial intelligence, reduces the barrier for competitors, especially so-called shadow banks, to enter the market, thereby driving margins down and compelling banks to take on unnecessary risk.
