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ECB Is Set to Step Up Focus on Geopolitical Risks at Banks

(Bloomberg) -- The European Central Bank plans to demand more information from banks about their exposure to geopolitical risks as supervision head Claudia Buch puts her stamp on the institution.

The ECB is poised to formally elevate next month the importance of potential hits from political events including wars in its annual list of banking supervisory priorities for the coming years, according to people familiar with the matter. That will entail increasing requests for information as well on-site inspections for banks, said some of the people, who asked to remain anonymous as the move has yet to be announced. 

The regulator’s decision to intensify its scrutiny of geopolitical risks is one of the largest expansions of its work since Buch took over at the beginning of the year. It comes amid heightened concern about economic shocks caused by wars in Ukraine and the Middle East as well as potential trade conflicts resulting from higher tariffs under US President-elect Donald Trump.

An ECB spokesperson declined to comment. Geopolitical risks “affect banks, but markets and risk managers often do not take them into account,” Buch said in a speech last week.

Buch is continuing the ECB’s ongoing effort to make banking supervision more effective by focusing on the risks it considers as most relevant for individual banks. The former Bundesbank official has said she plans to accelerate the pace at which the ECB puts pressure on lenders to fix perceived deficiencies.

The ECB’s new supervisory priority would create a significant amount of work for the affected lenders and their senior management, said some of the people. On-site inspections last several months and they typically involve staff from the ECB, national authorities and outside consultants, who can interview bank staff and ask them to confirm data. 

Some bank executives and even some regulators said they’re concerned that the ECB may adopt too blunt of an approach to calculating the impact of hypothetical geopolitical shocks on banks and their capital ratios. A senior banker said they would oppose factoring into these calculations the potential hit from multiple crises happening simultaneously, while a supervisory official said they want mitigating factors to also be taken into account.  

Banks use these internal calculations in discussions with the ECB on their plans for how much money they want to invest, use to back lending or pay out to shareholders. That means a worse result is likely to weigh on those plans.

Buch has previously signaled an increasing focus on how the impact of new global conflicts could play out in banks’ loan portfolios and trading businesses. The ECB wants to see “what do the banks do, are these realistic scenarios and how detailed are they?” she said last week.

The ECB has looked at geopolitical risk in the past. European banks weathered severe hits to their business from Russia’s full-scale invasion of Ukraine in 2022 thanks in part to state aid to affected industries. Still, lenders across the region set aside money for losses on loans to companies that were directly affected or suffered from the resulting spike in energy prices. 

The ECB’s annual list of supervisory priorities sets out the regulator’s focus for the coming three years. It guides operational planning and resource allocation. 

--With assistance from Esteban Duarte.

(Updates with additional Buch comments in ninth paragraph)

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