January 16, 2018 / 10:30 AM / a year ago

Flaws in ECB supervision of failing banks, EU auditors warn

* ECB process to identify troubles at banks has “deficiencies”

* Euro zone supervisor lacks proper guidelines to address a crisis

* ECB says concerns have been already addressed

By Francesco Guarascio

BRUSSELS, Jan 16 (Reuters) - The European Central Bank has “flaws” in its procedures for identifying and dealing with banks in crisis, European Union auditors said on Tuesday, casting doubts on the ECB’s supervision of the main banks in the euro zone.

Following the 2007-08 global financial crisis, the ECB has added to its monetary policy functions the task of supervising the top banks of the euro zone’s 19 countries. It currently oversees around 120 lenders which hold over 80 percent of the bloc’s banking assets.

The ECB’s supervisory unit - the Single Supervisory Mechanism (SSM) chaired by French regulator Daniele Nouy - has sweeping powers to spot and tackle emerging troubles at individual banks but does not yet have in place sufficient guidelines to exercise those powers, EU auditors said in a report published on Tuesday. “The ECB’s operational framework for crisis management has some flaws and there are some signs of inefficient implementation,” the European Court of Auditors (ECA) said.

In their report, auditors found “deficiencies” in the procedures the ECB use to identify potential banking troubles at an early stage, and to respond to a crisis. The ECB said concerns raised by auditors had been addressed after the audit was concluded in June.

The SSM has dealt since its establishment in 2014 with lingering troubles at euro zone banks caused by lower profits in the sector, an overcrowded market and a mass of bad loans which mostly saddle southern European lenders.

Auditors said the ECB would need to quickly gather information when a bank shows signs of distress, but it “has limited available on-site inspection teams to carry out a detailed analysis of asset quality for crisis banks.”

They also said the central bank had not developed proper guidance on how to assess emerging risks and use its powers in a crisis, which could allow an excessive discretion in taking key decisions.

“The latest guidance, which was produced in September 2017, was not taken into account during the audit process and addresses the concerns raised by the ECA,” the ECB said in replies included in the ECA report.

Auditors also said the ECB had no sufficient guidelines on the emergency procedure that is triggered when a bank is deemed “failing or likely to fail”. The ECB said it had already developed guidance on this matter and rejected the auditors’ recommendations on this point.

The procedure was used in the rescue of Spain’s Banco Popular in May, and led to the forced sale of Popular to rival Santander for one euro. Depositors and taxpayers were shielded in the process but bondholders lost their investment and are suing EU regulators.

The ECA, which is a European Union institution, said the ECB had not given its officials full access to relevant documents, limiting the scope and effectiveness of the audit.

The ECB said it had fully cooperated with auditors providing “a substantial number of documents and explanations,” but it said some information could not be shared with the ECA.

In a report published in November 2016, the ECA warned against possible conflicts of interest at the ECB over its supervision powers when it uses the same staff to perform monetary and supervisory functions. (Reporting by Francesco Guarascio)

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