The European Central Bank will increase scrutiny over how banks manage credit risk and diversify funding, it said on Monday while outlining its 2023 priorities as the euro zone heads into a likely recession and faces soaring borrowing costs.
The 19-country currency bloc is facing the double whammy of sky-high inflation and a sharp economic downturn, largely a fallout of Russia’s war in Ukraine, which has forced the ECB to tighten financing conditions even as it exacerbates economic pain.
The ECB, which supervises more than 100 big banks in Europe, said it will now take a closer look at lenders exposed to the most vulnerable sectors, including energy and energy trading, and will also keep a close eye on residential mortgages and commercial real estate.
“Higher interest rates and a sluggish or possibly recessionary growth outlook may challenge the debt-servicing capacity of borrowers going forward,” the ECB said in a statement.
A recent supervisory review also confirmed shortcomings in banks’ risk controls, particularly in monitoring loans, classifying distressed borrowers and provisioning, the ECB said.
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