The headquarters of the European Central Bank in Frankfurt, Germany. Picture: EPA
The headquarters of the European Central Bank in Frankfurt, Germany. Picture: EPA

Frankfurt— The European Central Bank (ECB) said on Tuesday that six out of 109 banks it evaluated last year had a level of financial strength below what it wants to see for 2020.

Four of the banks remedied the shortfall by the end of December, Andrea Enria, who leads the ECB’s supervisory arm, said in Frankfurt without identifying the banks. “The two remaining banks have been requested to take remedial actions within a well-defined timeline.” 

European banks have contended for a decade with steadily rising capital requirements that are only now starting to plateau. The regulatory burden, intended to strengthen lenders after the 2008 financial crisis, has added to headwinds from negative interest rates and a fragmented market that left banks on the continent struggling to keep up with Wall Street, where US government programmes helped lenders clean up balance sheets faster.

The ECB requires banks to hold a minimum capital amount — measured as common equity tier 1 capital (CET1) relative to risk-weighted assets — and an additional buffer that’s not binding. A bank that fails to meet the latter has to explain how it will return to an adequate level. If the bank’s capital level falls even lower and breaches its requirements, the lender is subject to restrictions on investor payouts and staff bonuses.

The banks dipped into the non-binding portion but didn’t go below their minimum requirements.

The ECB said its overall capital demands remained stable from last year. Banks face a slightly higher bar when factoring in additional buffers requested by other authorities. That measure rose to 11.7% CET1 capital from 11.5% to reflect that more funds are needed to weather a potential economic downturn and capital that’s designed to protect the wider financial system, according to the ECB.

The ECB pointed to progress on a key issue that has weighed on the industry in recent years: soured credit. Banks with high levels of bad loans are “broadly meeting the targets for cleaning their balance sheets”, the ECB said, adding they should continue their efforts.

The ECB is “broadly satisfied with the overall level of capital adequacy” of the big banks it oversees, Enria said. Still, the watchdog identified concerns related to their business models, internal governance and operational risks.

“While it is undeniable that the external environment is challenging, this is not going to change in the short term,” Enria said. “Banks need to sharpen their managerial efforts to refocus their business models, deploy effective strategies on digitalisation, and achieve more radical improvements in cost efficiency.”