FRANKFURT (Reuters) - Euro zone banks may face added scrutiny and supervisory measures if they do not follow non-mandatory guidance on their capital levels, Daniele Nouy, the European Central Bank’s top supervisor said on Monday.
While overall capital requirements may not rise after years of capital building, the ECB could suggest to particular banks to set aside more - and they would be well-advised to heed this guidance, Nouy told the European Parliament’s economy committee.
“This instrument, which we call ‘Pillar 2 guidance’, would be complementary to Pillar 2 requirements,” Nouy told a hearing. “Failing to meet Pillar 2 guidance is not in legal terms a breach of capital requirements.”
“But still, banks need to take it seriously: failing to meet Pillar 2 guidance would lead to intensified supervision and institution-specific measures designed to re-establish a prudent level of capital,” she added.
Nevertheless, the guidance will not be included in the calculation of how much a bank can pay out in bonuses, dividends and coupons, Nouy said.
Nouy added that capital levels for banks are well above regulatory requirements and investors’ main concerns are weak profitability and high cost of capital, not capital ratios.
“Cyclical profitability challenges come from the combination of muted loan demand and low interest rates,” Nouy said.
“Banks face other challenges too which are more structural in nature: first, non-performing loans continue to dampen the credit supply in some countries; moreover, banks’ costs reflect distribution channels that might suffer from over capacity in some cases,” she added.
Reporting by Balazs Koranyi; Editing by Catherine Evans and Hugh Lawson