The European Central Bank (ECB) said on Monday it would step up oversight of how banks manage credit risk and funding diversification as it laid out its priorities for 2023 as the eurozone faces a recession and more expensive credit, Reuters and Agerpres reported. .

Headquarters of the ECBPhoto: Martti Kainulainen / Shutterstock Editorial / Profimedia

The ECB, which oversees more than 100 of Europe’s biggest banks, said it would look more closely at lenders exposed to the most vulnerable sectors, including energy and energy trading, and monitor lending in the commercial and residential real estate sectors.

“Higher interest rates, a reduction in economic activity or possible prospects of a recession may create difficulties in the ability to repay loans in the future,” the Frankfurt-based institution said in a press release.

A recent review by the watchdog confirmed the banks’ weaknesses in relation to credit risk, particularly in monitoring loans, classifying reserves and customers in difficulty, the ECB said.

“In this way, banks become vulnerable in the event of a significant correction in some real estate markets, especially in the residential segment, taking into account the evolution of prices in recent years,” the Frankfurt institution warns.

Higher commissions

The ECB will carry out more targeted inspections of banks to encourage “correct and timely” recognition of expected credit losses due to increased provisions.

“Furthermore, higher interest rates and higher costs in the construction sector are likely to have a negative impact on the commercial real estate sector, particularly in the office space sector, which is already affected by the trend of workers working from home and the search for quality spaces post-pandemic,” it said. press release of the Frankfurt-based institution.

Another key risk is how banks manage the cost of borrowing.

Last month, the European Central Bank began the biggest cash withdrawal from the eurozone banking system in the ECB’s history, as the Frankfurt-based institution offers banks the first chance to repay hundreds of billions of euros in loans. euros provided by the central bank of the eurozone bank.

Banks benefited from €2.1 trillion in loans they received from the ECB under the ECB’s Targeted Long-Term Refinancing Operations (TLTROs).