Jacob Gyntelberg's interview with Handelsblatt: Banking regulator warns of indirect consequences of war

Banking regulator warns of indirect consequences of war

According to Gyntelberg, the Director of the EBA, the effects will mainly be felt by financial institutions in eastern Europe and Germany. However, he considers the sanctions and possible counter-sanctions to be ‘comfortably manageable’ by the financial system on the whole.

European banking regulator EBA believes that the indirect consequences of the Ukraine war, such as rising energy prices, may place a greater burden on European banks than the immediate consequences of the conflict. In particular, it expects German and eastern European banks to experience delayed effects. ‘The first-round effects of the war in Ukraine are not a major problem for European banks. The indirect consequences of the war – in other words, the second-round effects – are likely to hit European banks harder,’ says Jacob Gyntelberg, Director of the EBA, in an interview with the Handelsblatt.

According to current forecasts, the European economy will grow two to three percentage points more slowly this year. ‘High energy and food prices are a burden for the bank clients, especially as the price increase is likely to be accompanied by higher interest rates,’ says the EBA Director for Economic and Risk Analysis in his first interview.

Possible second-round effects include ‘Russian counter-sanctions,’ such as a freeze or restrictions on oil and gas supplies. ‘How hard this will hit individual European economies depends not only on their dependence on Russian energy sources, but also on where Russian oil and gas is needed,’ Gyntelberg explains. A sharp increase in energy prices is a problem, especially for energy-intensive heavy industry. ‘This is particularly true for some eastern European countries such as Hungary, Lithuania and Bulgaria, but also Germany.’

For this reason, the possible burdens vary for each national banking system. Eastern European, German and Austrian banks are particularly affected by credit risks as part of the second-round effects. ‘This is less true for French banks, and hardly an issue at all for Spanish and Italian banks,’ Gyntelberg says.

The banking regulator does not expect major disruption in the European financial system. ‘The economic impact of sanctions on the European economy, which have been predictable so far, would be comfortably manageable for the European financial system.’ According to Gyntelberg, while experts expect to see much lower growth, these forecasts are less harsh than the scenarios that the EBA ran through in its stress test last year. ‘All in all, European banks performed well in this stress test.’

This statement also applies in the event that Russia stops its energy supplies or the EU imposes an embargo on Russian oil and gas, thus banning imports, which in his view would ‘almost certainly cause a recession’. ‘While this would lead to higher losses for banks, I believe that the capital buffers of most banks are large enough for such a scenario, as is the case for the German banking system,’ Gyntelberg says. ‘Evidently, it can always hit individual banks, but I don't think the stability of the system is in any danger.’

Notwithstanding the strains caused by the war in Ukraine, Gyntelberg says the ‘regular EBA stress test’ will be carried out again in the coming year. This time, however, he suggests that the crisis scenarios would be very different. ‘Instead of a low-interest-rate scenario, we are expected to look at the effects of a significant increase in interest rates, as well as the impact of an energy-price shock and the shocks affecting certain industry sectors,’ he says.

Major climate stress test for the financial system in 2024

In the medium term, climate and environmental aspects will also be integrated into the regular stress test.

But first, there should be a separate climate check: Gyntelberg reveals a major joint climate stress test to be conducted by the European regulatory authorities. ‘In 2024, we will conduct a major joint climate and environmental stress test together with the other European regulatory authorities, insurance regulator EIOPA and securities and investment-fund regulator ESMA,’ he says.

In doing so, the EBA is committing itself to an ambitious timetable, since climate stress tests are a relatively new instrument for regulatory authorities, with little experience and no established methodologies in the matter. The European Central Bank (ECB) and EIOPA are currently conducting their first climate stress tests among the institutions they supervise. The ECB calls it a ‘learning exercise’.

Gyntelberg does not regard this as an obstacle. ‘We do not yet have a perfect, sophisticated methodology to simulate climate and environmental risks in great detail, and we also need to make certain assumptions,’ he admits. Overall, however, there is a framework that allows for reasonably realistic forecasts. But from his point of view, there is another important aspect: ‘The most important question for us is how sensitive the bank portfolios are to these risks. This issue is more important than accurately predicting the damage,’ he says.

How big the financial impact of climate risks actually is for banks is a contested topic. In a climate stress test carried out in the UK, the results of which have not yet been published, market participants report that the crisis scenarios caused only minor damage to the capital base of the institutions involved. From Gyntelberg’s perspective, this finding does not necessarily mean much. First, he advised that we wait for the results of the ECB stress test. ‘The French regulator came to slightly more worrying conclusions than the UK authorities in a climate stress test carried out among French banks,’ he says.

However, the French used a longer time horizon than the British in their stress test. ‘Over a period of 5 years, there may not be any major changes, but over 30 to 40 years, the effects are clearer to see.’ In the long run, climate and environmental considerations should be integrated into much more than just stress tests. ‘We are currently reviewing all regulatory instruments to see if and how climate and environmental aspects can be taken more into account,’ Gyntelberg says.

In May, the EBA plans to publish a discussion paper on the integration of these aspects into the mandatory requirements for banks’ core capital. Climate and environmental aspects must also become part and parcel of both risk management and the annual supervisory review and evaluation process. ‘By the summer of 2023, we intend to publish guidelines on how sustainability risks should be considered in risk management and capital regulations.’

The interview was conducted by Yasmin Osman

Handelsblatt, 25 April 2022