Federal Reserve Just Said Banks Are ‘Sound And Resilient.’ Another One Might Collapse.
Daily WireDec 24, 2022
The Facts
The European Court of Auditors (ECA) released a report on the European Central Bank (ECB) on Friday, concluding that its supervisors are lax towards the highest-risk lenders, applying rules inconsistently and not clearly linking risks to the capital requirements imposed.
This comes as the ECB, which directly oversees 110 European banks in the eurozone and Bulgaria under the 2014 Single Supervisory Mechanism, has recently warned that the current economic environment is deteriorating the outlook for banks.
The Spin
Narrative A
European regulators have been using all the regulatory tools at their disposal to ensure that supervised banks address material shortcomings while also urging lenders to be more selective with clients and prudent in how they manage their exposure to financial market risks. If these moves are not enough, the ECB can make qualitative demands as a last resort.
Narrative B
The bad management of credit risks is a systemic problem rather than a lack of compliance by banks, despite the ECB long attempting to pass the buck. Supervisors have consistently selected lower capital requirements for the highest-risk banks, often requiring higher requirements from lower-risk lenders.