ECB to Crack Down on Banks Ignoring Supervisory Demands

The European Central Bank (ECB) is preparing to take a tougher stance against banks that are slow to address its supervisory findings, reports Bloomberg.

The central bank, which oversees the eurozone's top financial institutions, has issued thousands of supervisory measures since assuming its oversight role in 2014. However, the ECB has encountered frustration over banks' sometimes sluggish responses, leading to a backlog that it now aims to clear.

The ECB, which does not publicly disclose data on the timeliness of banks' responses, is planning to increase pressure on lenders to tackle the backlog in 2025, according to people familiar with the matter who spoke to Bloomberg on condition of anonymity.

"The move is a test of whether Claudia Buch, the ECB’s top banking watchdog, can see through her pledge of making supervision more effective," Bloomberg reports. Bankers were already expressing dissatisfaction with regulators' increasing intrusiveness, particularly as US counterparts are expected to adopt a more lenient approach under the incoming Trump administration.

As part of its crackdown, the ECB will require banks to develop plans for reducing their outstanding findings and measures, and to demonstrate their capacity to execute those plans. Banks that repeatedly miss deadlines will face heightened scrutiny, and those failing to show progress could face fines.

The ECB's supervisory measures, which vary in severity, address a wide range of issues, including market risk management and corporate governance. These measures can stem from on-site investigations, such as the ECB's probe into leveraged finance this year, or from standard regulatory interactions, such as the Supervisory Review and Evaluation Process (SREP).

A 2024 independent review of the SREP process highlighted challenges with the "follow-through process" for some orders, noting that "the late or inadequate remediation of qualitative measures does not trigger any automatic escalation or reassessment."

Bank executives, speaking anonymously to Bloomberg, confirmed that their institutions are struggling with the volume of ECB demands, leading to a growing backlog of outstanding findings and measures. A senior manager at a major US bank stated that the ECB's demands exceed those from all other regulators combined.

The ECB's December 2024 outline of its 2025-2027 priorities flagged a "progressive shift in focus from risk identification to risk remediation."

"Accordingly, banks with unresolved material shortcomings will be asked to step up their efforts to fully comply with supervisory expectations and implement sound remedial action plans in a timely manner," the ECB stated.