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Euro zone banks handled the recent surge in inflation and
interest rates with remarkable ease and largely escaped last
year's U.S and Swiss banking turbulence, raising the risk of
complacency and fuelling calls for lenders to prepare for more
difficult times.
Loan losses have remained exceptionally low, despite a near
recessionary environment, but this may be down to unprecedented
fiscal and monetary support that shielded banks from shocks,
Claudia Buch, the ECB's top bank supervisor said on Thursday.
"This has implications for future risk assessments, as past data
on loan defaults do not truly reflect the risks to asset quality
that lay ahead," Buch said in the bank's annual report of
supervision.
Lenders also need to better prepare for risk related to cyber
attacks, climate change and geopolitical shifts, which could all
fundamentally alter their long-term business models.
"It is therefore crucial that banks adjust their risk management
practices to the new environment," Buch said.
Innovation, such as the wider use of distributed ledger
technology and artificial intelligence, lowers the bar for
competitors, including so-called shadow banks, to enter the
market, potentially pushing down margins and forcing banks to
take on undue risk.
"Innovation and increased competition may improve economic
welfare, but they also create new risks," Buch said. "If banks
see their margins being squeezed, they may turn to potentially
riskier activities."
(Reporting by Balazs Koranyi; Editing by Mark Potter)
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