ECA special report No. 02/2018
16 January 2018
Source: European Court of Auditors
The report was produced by Audit Chamber IV, headed by ECA Member Baudilio Tomé Muguruza. The audit was led by ECA Member Kevin Cardiff, supported by Gediminas Mačys, Shane Enright, Tony Murphy, Zacharias Kolias and Mirko Gottmann. The audit team consisted of Paraskevi Demourtzidou, Jörg Genner, Violeta Radu and Giorgos Tsikkos.
The ECA special report assessed the operational efficiency of the management of the ECB in relation to one specific supervisory task: crisis management. The auditors found that the ECB has established a substantial framework for crisis management. However, there are some design flaws and signs of inefficient implementation that should be addressed, they say, and make a number of recommendations relating to making better use of recovery plan assessments and developing operational guidance for crisis management activities and enhance management reporting systems.
About the Single Supervisory Mechanism
The 2008 financial crisis prompted large changes in financial regulation in the EU. The legal framework for banking supervision was strengthened and the Single Supervisory Mechanism (SSM) has been established in 2014. Supervision of large banks in the euro area became the responsibility of the European Central Bank (ECB). The SSM comprises the European Central Bank (ECB) and the national supervisory authorities of the participating countries. One of its main aims is to enhance the stability of the euro area banking system.
What we audited
This audit examined the operational efficiency of the ECB’s management of one specific supervisory task – crisis management. This is the process used by supervisors for identifying banks which are experiencing financial difficulties and intervening when necessary. The objective of crisis management is the preservation of financial stability and a reduction in the reliance on public funds. Crisis management involves advance recovery planning by banks in order to be prepared for crisis situations. It also involves identification by the supervisor of a deterioration of the financial situation of a bank and, where necessary, the use of early intervention powers.
What we found
Overall, in its supervisory role, the ECB has established a substantial framework for crisis management procedures. 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 ECB is finalising arrangements for external cooperation and coordination with other supervisory authorities and the Single Resolution Board. Nevertheless, the outstanding issues have the potential to delay and restrict information-sharing and detract from the efficiency of coordination.
The ECB’s process for the assessment of banks’ recovery plans is positive. Submission and monitoring procedures are in place, and assessors have access to useful tools and guidance, even though it could be enhanced, namely for the area of recovery plan indicators. Moreover the results of the recovery plan assessments are not systematically used for crisis identification and response. Also, we cannot conclude on the operational efficiency of the management of this process in practice due to lack of evidence provision by the ECB.
The ECB’s operational framework for crisis management has some flaws, and there are signs of inefficient implementation. Guidance for early intervention assessments is underdeveloped and does not define objective criteria or indicators for determining that a bank has entered a crisis situation. There is no guidance on the best use of the ECB’s powers or the most appropriate measures to be considered in specific scenarios. We obtained no comprehensive evidence on the actual use of its powers so cannot conclude on the efficiency of its management in practice. Guidance on “failing or likely to fail” assessments is also lacking in scope and detail.
Access to evidence
The ECB refused to provide important evidence which we requested to carry out the audit, which had a negative impact on the audit work. This means that our observations and conclusions are provisional. We can draw overall conclusions about the design of the ECB’s processes, but we are unable to confirm the operational efficiency of crisis management at the ECB in practice.
What we recommend
We make a number of recommendations to improve crisis management by the ECB.
In the area of co-operation, the ECB should improve co-ordination with external actors and adopt an internal framework for the supplementary supervision of financial conglomerates. For recovery planning, the ECB should provide additional guidance regarding the calibration of recovery plan indicators.
For crisis identification, the ECB should further develop its guidance on early intervention assessments and set indicators for determining deterioration in the financial condition of a bank. It should make systematic use of information from recovery plan assessments in these circumstances too.
In the area of crisis response, the ECB should ensure that issues are quantified before crisis response measures are considered, and establish reporting for systematically monitoring asset quality. It should also further develop its operational guidance on early intervention assessments, including making systematic use of insight it has gained through the assessment of banks’ recovery plans. Finally, in the area of “failing or likely to fail assessments”, the ECB should further develop its operational guidance. more…