ECB revamps its annual health checks on banks

FRANKFURT (Reuters) - The European Central Bank is streamlining its health checks on the euro zone's banks, allowing it to train its focus on pressing lapses and get tough on laggards.

The central bank's supervisory chief, Claudia Buch, said while the revamp would make its annual checks less cumbersome, it would also make greater use of powers to penalise and force changes.

The ECB checks on the financial health of around a hundred of the bloc's biggest lenders, but has often complained that banks are slow in making vital changes, whether to their technology or risk management.

Banks have countered that the ECB's so-called Supervisory Review and Evaluation Process (SREP) was cumbersome and more about ticking boxes than keeping up with big changes to the economy or geopolitical shocks, such as war.

Following that criticism and a 2023 report from a group of experts, the ECB said it would start making the process more dynamic and stricter on lenders that dragged their feet.

"The SREP will become shorter and move closer to real-time supervision," Buch said in a blog post on Tuesday. "This is more relevant than ever considering the fast-evolving risk environment."

"When remediation of identified weaknesses is insufficient, ECB Banking Supervision will expeditiously increase the severity of supervisory tools and swiftly move up the escalation ladder," she added. Those could include penalties and stricter standards.

To keep banks happy, the ECB will be clearer in communicating what changes it wants and in setting deadlines.

Nicolas Veron, an expert in banking policy with think tank Bruegel, said the move showed how the supervisor was streamlining procedures and establishing itself a decade after it was set up in the wake of the global financial crisis.

Although the ECB already had powers to penalise banks, the lengthy back and forth with wayward lenders blunted its clout.

"The new SREP will not mean less supervision or a light touch," Buch said. "Supervision will become more effective."

Changes will start in the second half of this year and will be finalised for the 2026 SREP cycle.

The updates will also involve a new means of setting so-called Pillar 2 capital requirements, or tailor-made buffers banks need to build for an emergency.

This new framework will be published this year and applied from the 2026 checks, Buch said.

However, banks that perform according to expectations and whose risk profile does not change materially can expect less intrusive supervision, Buch added.

If the ECB's assessment shows no changes to the riskiness of a bank, SREP decisions on capital requirements could be updated once every two years, extending an exception so far available only to a handful of lenders.

(Reporting by Balazs Koranyi, additional reporting by John O'Donnell; Editing by Kim Coghill, Sharon Singleton and Sriraj Kalluvila)