Eurozone banks must adjust their risk management methods, according to the ECB.
The Zhitong Finance App learned that the ECB said that Eurozone banks must adjust their risk management methods because these banks face various challenges, including the end of ultra-low interest rate policies and the rapid seizure of market share by non-traditional competitors.
Eurozone banking has coped fairly easily with recent surges in inflation and interest rates, largely escaping last year's turmoil in the US and Swiss banking sector, which has increased the risk of complacency and intensified calls for the banking sector to prepare for more difficult times.
ECB's top banking director Claudia Buch said on Thursday that despite the economic environment being close to recession, loan losses remained extremely low, possibly due to unprecedented fiscal and monetary support, which protected banks from shocks.
“This has an impact on future risk assessments because past data on loan defaults does not truly reflect future risk to asset quality,” Buch said in the bank's annual regulatory report.
Lenders also need to be better prepared for the risks associated with cyber attacks, climate change, and geopolitical changes, all of which have the potential to fundamentally alter their long-term business models.
“Therefore, it is critical that banks adapt their risk management practices to the new environment,” Buch said.
Innovations such as distributed ledger technology and artificial intelligence have lowered the entry threshold for competitors (including so-called shadow banking), which may lower profit margins and force banks to take excessive risks.
“Increased innovation and competition may improve economic welfare, but they also create new risks,” Buch said. “If banks see their margins being squeezed, they may turn to potentially riskier activities.”