ECB Bank-Crisis Management Needs Improvement, Auditors Find

(Bloomberg) -- The European Central Bank should upgrade its procedures for handling bank crises by improving its response to the most urgent cases and by streamlining its coordination with the euro-area bank-failure authority, according to the European Court of Auditors.

“The ECB’s operational framework for crisis management has some flaws, and there are signs of inefficient implementation,” the ECA said in a report published on Tuesday. The EU auditors made a series of recommendations with target dates for implementation stretching into next year. The ECB has accepted most of the recommendations, the auditors said.

The ECA report suggests that the ECB “refused to provide important evidence” that the auditors had requested. “This had a negative impact on the audit work to the extent that the ECA was able to draw overall conclusions about the design of the ECB’s processes, but was unable to confirm the operational efficiency, in practice, of its crisis management.”

The ECB’s oversight arm, created in 2014 and headed by Daniele Nouy, has seen its crisis management tested in the last year. In early June, it determined that Spain’s Banco Popular Espanol SA was “failing or likely to fail,” and handed it over to the Single Resolution Board. The Brussels-based SRB forcibly sold the ailing lender to Banco Santander SA, wiping out equity and about 2 billion euros ($2.4 billion) of junior bonds to absorb losses.

Public Money

About two weeks later, the ECB declared two Italian lenders, Veneto Banca SpA and Banca Popolare di Vicenza SpA, “failing or likely to fail.” The two firms were wound down under Italian law with a commitment of as much as 17 billion euros of public money to make the deal work.

“Overall, in its supervisory role, the ECB has established a substantial framework for crisis management procedures,” the ECA report states. “The ECB’s organizational 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 auditors’ report states that the ECB’s operational guidance on “failing or likely to fail” is “too narrow” and should be further developed. The central bank’s cooperation with the SRB and other supervisors, which rests on the exchange of information, should be enhanced, according to the report.

The ECA report also says the ECB should develop clear thresholds for “determining a potential deterioration in the financial condition of a bank, making use of some of the indicators and triggers that have been assessed as suitable in the context of the assessment of the bank’s recovery plan, and link them to clear escalation processes to allow for the operationally efficient use of the available information.”

Markus Ferber, a lawmaker in the European Parliament, said the ECA’s findings are “worrisome.”

“I find it troubling that the ECB does not even have clear criteria about what constitutes a crisis and what needs to be done in a crisis,” he said. “The ECB has to improve in this area. In a crisis situation, the most important banking supervisor in the Union cannot simply act free of all rules and objective criteria.”

To contact the reporter on this story: Patrick Henry in London at phenry8@bloomberg.net.

To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Richard Bravo, Zoe Schneeweiss

©2018 Bloomberg L.P.