European Central Bank should upgrade procedures handling bank crises by improving response to most urgent cases and streamline coordination with eurozone bank-failure authority, says European Court of Auditors.
“The ECB’s operational framework for crisis management has some flaws, and there are signs of inefficient implementation,” the ECA said in a report published on Tuesday. The EU auditors made a series of recommendations with target dates for implementation stretching into next year. The ECB has accepted most of the recommendations, the auditors said.
The ECA report suggests that the ECB “refused to provide important evidence” that the auditors had requested. “This had a negative impact on the audit work to the extent that the ECA was able to draw overall conclusions about the design of the ECB’s processes, but was unable to confirm the operational efficiency, in practice, of its crisis management.”
The ECB’s oversight arm, created in 2014 and headed by Daniele Nouy, has seen its crisis management tested in the last year. In early June, it determined that Spain’s Banco Popular Espanol was “failing or likely to fail,” and handed it over to the Single Resolution Board. The Brussels-based SRB forcibly sold the ailing lender to Banco Santander, wiping out equity and about €2 billion of junior bonds to absorb losses.
About two weeks later, the ECB declared two Italian lenders, Veneto Banca and Banca Popolare di Vicenza, “failing or likely to fail.” The two firms were wound down under Italian law with a commitment of as much as €17 billion of public money to make the deal work.
The euro symbol in front of the ECB building in Frankfurt (Shutterstock)
“Overall, in its supervisory role, the ECB has established a substantial framework for crisis management procedures,” the ECA report states. “The ECB’s organisational set-up and resourcing for the assessment of recovery plans and the supervision of banks in crisis are satisfactory, despite weaknesses in initial planning and a need to improve the allocation of staff to the most urgent situations”.
The auditors’ report states that the ECB’s operational guidance on “failing or likely to fail” is “too narrow” and should be further developed. The central bank’s cooperation with the SRB and other supervisors, which rests on the exchange of information, should be enhanced, according to the report.
The ECA report also says the ECB should develop clear thresholds for “determining a potential deterioration in the financial condition of a bank, making use of some of the indicators and triggers that have been assessed as suitable in the context of the assessment of the bank’s recovery plan, and link them to clear escalation processes to allow for the operationally efficient use of the available information”.