On November 13, the European Central Bank (ECB) published its latest Supervision Newsletter, offering detailed insights into supervisory developments, challenges, and practices shaping the European banking sector. The newsletter includes key reflections on 10 years of the Single Supervisory Mechanism (SSM), climate-related data challenges in real estate, intraday liquidity risk, exposures to private equity and private credit funds, and evolving IT and cybersecurity risks.

The ECB's exploratory review of bank exposures to private equity and private credit funds revealed:

• Banks face significant credit risks from exposures to these funds, particularly through portfolio company financing and fund-level lending.
• Risk management is fragmented, with banks struggling to aggregate exposures across clients and products.
• Supervisory expectations for improved risk aggregation and monitoring will be outlined, with banks required to conduct gap assessments against these expectations.

The newsletter also highlighted:

• Climate Data Gaps: Challenges in collecting energy performance data for real estate loans, with solutions involving IT upgrades and public databases.
• Intraday Liquidity Risk: Calls for improved monitoring, stress-testing, and governance to mitigate risks from payment mismatches.
• Cybersecurity Risks: Rising threats like ransomware and ICT vulnerabilities underline the need for stronger governance and alignment with the upcoming Digital Operational Resilience Act (DORA).
• Supervisory Data: Updates on rising NPL ratios for commercial real estate loans and strong profitability for less significant institutions.

The ECB continues to advance its supervisory priorities, with a focus on emerging risks and enhancing the resilience of the European banking sector. For further information please contact Nicholas Smith ([email protected])