ECB says six banks missed this year’s bar for capital strength

Bloomberg

The European Central Bank (ECB) said six out of 109 banks it evaluated last year had a level of financial strength below what it wants to see for 2020.
“For those banks which have not taken satisfactory measures in the last quarter of 2019, remedial actions have been requested within a precise time line,” the ECB said in a statement on Tuesday in Frankfurt. It didn’t identify the lenders.
European banks have contended for a decade with steadily rising capital requirements that are only now starting to plateau. The regulatory burden, intended to strengthen lenders after the 2008 financial crisis, has added to headwinds from negative interest rates and a fragmented banking market that left banks on the continent struggling to keep up with Wall Street, where US government programs helped lenders clean up balance sheets faster.
The ECB requires banks to hold a minimum capital amount — measured as common equity Tier 1 capital relative to risk-weighted assets — and an additional buffer that’s not binding. A bank that fails to meet the latter has to explain how it will return to an adequate level. If the bank’s capital level falls even lower and breaches its requirements, the lender is subject to restrictions on investor payouts and staff bonuses.
Tuesday’s release didn’t say which levels were breached by the six banks.
The ECB said its overall capital demands remained stable from last year. Banks face a slightly higher bar when factoring in additional buffers requested by other authorities.
That measure rose to 11.7% CET1 capital from 11.5% to reflect more funds that are needed to weather a potential economic downturn and capital that’s designed to protect the wider financial system, according to the ECB.
The ECB pointed to progress on a key issue that has weighed on the industry in recent years: soured credit. Banks with high levels of bad loans are “broadly meeting the targets for cleaning their balance sheets,” the ECB said, adding they should continue their efforts.
The ECB is “broadly satisfied with the overall level of capital adequacy” of the big banks it oversees, Andrea Enria, who leads the central bank’s supervisory arm, said in the statement. Still, the watchdog identified “remaining concerns, in particular when it comes to the business models, internal governance and operational risks in banks.”

ECB’s Mersch warns loose rate policy raises market drop risk
Bloomberg

European Central Bank stimulus has contributed to “very elevated” asset prices that raise the prospect of a sudden market drop, Executive Board member Yves Mersch said, in a speech that also warned of the risks to the institution’s credibility.
“These unusual times call for heightened vigilance regarding the financial-stability consequences of our monetary-policy actions,” Mersch said at an event in his native Luxembourg. There is “no clean separation between the pursuit of monetary stability and that of financial stability in the medium term.”
After years of falling short of its inflation target despite pumping trillions of euros into financial system, ECB is starting a wide-ranging review of its strategies. It’ll look at issues such as why price growth remains so sluggish and the effectiveness of instruments such as negative interest rates.
and bond purchases.
The side effects of those policies are increasingly becoming visible — a development the ECB has acknowledged in both words and action. In its Financial Stability Review late last year, it warned of potential future market corrections; with its two-tier system of remunerating deposits it’s trying to alleviate pressure on bank profitability.
In an answer to questions after the speech, Mersch said that lenders’ margins are improving, but they’re still at a low level because they didn’t keep production costs in line with volumes. Household savings have been more or less stable, but the ECB would react to unwanted behaviours.
While backing the need for “highly accommodative” policy just now, Mersch noted that surveys show a divergence between support for the euro and trust in the ECB, with faith in the central bank waning since the financial crisis. That can blunt the effectiveness of its measures, by damping inflation expectations, and threaten its autonomy.
“A prolonged loss of trust in the ECB risks undermining the broad public support that is necessary for central-bank independence,” he said. “This is of particular concern when the range of non-conventional measures brings monetary policy closer to the realm of fiscal policy and the institutional effects of these policies are becoming more pronounced.”