The European Central Bank on Wednesday told banks to step up how they manage struggling borrowers and their own currency trading in an environment of higher interest rates and jittery financial markets.
Andrea Enria, head of the ECB's Supervisory Board, has long worried about the economic fallout of rising borrowing costs and recently said the bank was seeing "some early signs" of loans being paid with a delay.
In its quarterly newsletter, the ECB said it had found deficiencies in how banks grant forbearance to borrowers, which mostly involves changing the terms and conditions of their loan or giving them a new one.
"In the current economic environment, characterised by inflationary pressures, rising interest rates and an uncertain outlook, it is essential that banks prepare their processes for a potential increase in distressed debt and refinancing risk," the ECB said.
It now expected banks to improve how they identify clients in financial difficulties, how they ensure these clients are granted the appropriate kind of help and how they monitor the situation.
In a separate newsletter article, the ECB set good practices that banks should follow when trading foreign currencies.
Among them, banks should set binding limits on foreign exchange exposure until the payment arrives and consider clawing back bankers' pay as a penalty for failed trades.
"Banks could also adjust the remuneration of front office staff to take failed trades into consideration," the ECB said.
