Kozlovs (Eca): «We cannot say that just because the level of NPLs is low we won the war over NPLs»

There is no contradiction between the fall of Npls, what we call legacy Npls, and the findings of our report. First of all, legacy Npls have been going down and are still going down. The ECB's policy is not the only factor behind this fall, other factors contributed as we highlighted in the report. But we will be able to assess the result of the ECB's policy on this only in 2026, which is the deadline for implementing it and thus of this reduction process. The trend is good, Npls have been falling and are falling.

But the economic situation can change rapidly and a turnaround on Npls can arrive very quickly, especially now with the war in Ukraine, the rise of interest rates. And we cannot say that just because the level of NPLs is low we won the war over Npls. To win the war, we must make sure banks have proper credit risk management. Apart from legacy Npls, there are also new Npls. The Srep is a yearly exercise and these assessments are feeding into the overall SREP score of a bank. Credit risk management is a process, the quality of the assessments of a bank's credit risk was good, but there is always room for improvement. One example where improvement is needed is the determination of the pillar 2 requirements: we found out that the banks with higher risks did not get, proportionally higher capital requirements .

In fact, for these higher risk banks the final P2Rs, which are expressed as a percentage of risk-weighted assets, were not high enough. In other words, they were not at the upper end of the range pre-defined by the ECB as we would have expected, but at the lower end or even below the minimum of the pre-defined range. Another example where we see room for improvement are the supervisory measures. Actually, the ECB can instruct banks to take corrective action to reduce the level of inherent risk or to strengthen management and control arrangements. In our evaluation, based on a sample of 10 banks out of the 110 supervised by the ECB, the supervisory measures taken by the ECB were not rigorous enough in this respect.

The same is true for banks with the weakest scores for credit risk control over the 2014-2021 period, which we analysed on top of the sample. The Ecb should use in full all its arsenal of tools.Being less rigorous, meaning imposing on weaker banks capital requirements at the lower end of the pre-defined ranges for capital requirements helped those banks which would not have sufficient capital or headroom to comply with higher requirements.In a way this shows that different objectives of a policy can be contradictory. Our objective was to evaluate the supervisory practices to ensure homogeneous supervision in the Banking Union, which is a pre-condition to make the Banking Union. This was our starting point. We found out that the ECB indeed pays attention to the banks' particular situations. I am not saying that we are against this, but when the ECB does not apply a higher pillar 2 capital requirements for higher risk banks, it must be more transparent, it must explain its methodology. For this purpose, I stress the importance on figure 8 in the report which compares overall risk scores and Srep scores and pillar 2 requirements from 2017 to 2021.

The ECB has rejected your recommendation on staff. May you explain your position?

The point we make was not that the ECB does not have enough staff. Our main message is not that overall there is a lack of staff. But we said that the SSM board should be given full powers to decide on its staff needs. The ECB argues it already has these powers. However, we saw it differently as the Governing council decides for both the monetary policy arm and the banking supervision arm. We also found that in some circumstances, where the ECB had prioritised some work, for example on internal model assessments, this was not fully done. This was because, amongst others, 9 out of 22 National competent authorities failed to provide the staff required.