The central bank’s banking supervisors want to know exactly how banks deal with unforeseen risks.
(Photo: dpa)
Frankfurt The accumulation of unforeseeable trouble spots and their consequences for the credit risks of banks are increasingly becoming the focus of financial supervision. The ECB has requested extensive information from several financial institutions on how they make provisions for risks that are difficult to calculate, such as the consequences of the Ukraine war. The Handelsblatt learned this from financial circles.
Specifically, it is about general value adjustments, so-called management overlays or post-model adjustments. Banks use these to take into account risks that are not represented by their usual risk models. These buffers are formed in addition to regular risk provisions.
According to insiders, the ECB wants to find out from the financial institutions how well they can justify this “freehand” determination of the need for provisions. On the other hand, the ECB would like to make it easier to compare banks. If institutes with similar loan portfolios and risks differ significantly from each other in terms of general provisions, the financial regulator is likely to question this critically.
Some banks are preparing for the fact that the ECB could then issue new rules for creating additional risk provisions. So far, however, the institutes have not received any feedback on their information.
When asked, an ECB spokeswoman referred to the ECB’s priorities for the years 2023 to 2025, which were published at the beginning of the year.
German banks have different strategies
Dealing with credit risks has been a major concern for the ECB supervisors since 2020. At the time, many large banks adjusted their risk provisioning models due to the uncertainties in the corona pandemic. Some institutes changed certain threshold values in the models. Others solved the problems via the now examined flat-rate value adjustments. But there were also institutes that did not react to the pandemic because their models did not depict them.
In its annual letter to the bank bosses, the ECB expressed its irritation at both the institutions that simply waited and the banks that intervened directly in their models. She had asked the financial institutions that work with flat-rate value adjustments to justify their subjective assumptions as well and objectively as possible.
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In Germany, several large banks have made general risk provisions in recent years because they felt that the risks from the pandemic and the Russian attack on Ukraine and the consequences were not adequately covered with their standard models.
At Commerzbank, this additional provision is called “top-level adjustments”, or TLA for short. At the end of the third quarter of 2022, it amounted to around 500 million euros. Germany’s second-largest private bank began to build up additional provisions at the beginning of the pandemic. After the pandemic subsided and the war in Ukraine began, she rededicated large parts of it. The remaining funds are now mainly there to cover risks from the war, possible energy shortages and supply chain problems.
DZ Bank took a similar approach. According to co-boss Uwe Fröhlich, the leading cooperative institute made an adjustment of 270 million euros in mid-2022. In doing so, the institute has taken precautions against risks from the war in Ukraine, energy bottlenecks “and everything related to them,” said Fröhlich.
The situation at Deutsche Bank is different: In 2020, the largest German commercial bank had formed a “management overlay” of 130 million euros due to possible consequences of the pandemic, which was completely dissolved in the following financial year. At the beginning of 2022, the institute formed a flat-rate extra risk provision of 83 million euros for the Ukraine war, which was also released again in the third quarter of 2022.
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