The audit was performed by the European Court of Auditors (ECA) and highlighted quite a number of shortcomings with the ECB's supervision and management. Here's a list of that:
- ECB supervisors are often too lenient with banks in how they manage credit risk, especially in the case of the worst performers
- ECB is inconsistent in applying rules and exercises leniency towards the highest-risk lenders while not always having adequate supervisory staff
- ECB also takes too long in issuing final capital requirement decisions, leading to related risks being not managed in a timely manner
Although the recommendations and audit findings are non-binding, these are potential red flags at least in my view. That despite policymakers continuing to insist that the banking system is fine and well managed. I mean, when shit really hits the fan, it doesn't seem like regulation is tight enough on the part of the ECB.
The ECA says that the central bank "did not impose proportionally higher capital requirements when banks faced higher risks, meaning that risks are not clearly linked to the requirement imposed. Adding that "for the highest risk banks, it consistently selected requirements at the bottom of the pre-defined ranges" with the ECB failing to sufficiently escalate supervisory measures when credit risk was high and sustained.
In other words, the above is pretty much leading to cases where a lower risk bank could actually have higher capital requirements than a higher risk bank in general. Yikes.
