José Manuel Campa interview with De Tijd: Weak banks must disappear from our system faster

Weak banks must disappear from our system faster

Banks must remain particularly cautious as the surge in the Omicron variant increases economic uncertainty. José-Manuel Campa, Chairperson of the European banking watchdog, the EBA, can already see other major risks for the sector.

The 57-year-old Spaniard took over as head of the European Banking Authority (EBA) 2 years ago, making him the arbitrator of the European banking sector.

The EBA was set up 10 years ago, in the wake of the financial crisis, to establish rules for banks in the euro area and ensure that national supervisors interpret them correctly. The organisation, whose vice-chair, Jo Swyngedouw, is Belgian, comes under the spotlight every 2 years when it organises the infamous stress tests to assess the resilience of the major banks in the euro area.

Any referee can expect to be booed from the sidelines at times, and Campa is no different. ‘Banks often complain that they have to follow too many rules,’ says Campa, a former Spanish Secretary of State for the Economy, who also worked for banking giant Santander for many years. ‘But on the plus side, the quality of the regulation is much better now. Efforts made over the past decade have made the sector more transparent and our banks are much better capitalised and more resilient than they were before the crisis.’

The banks have withstood the many months of the Covid crisis fairly well so far, but the fourth wave and the surge in the Omicron variant have significantly increased economic uncertainty once again.

‘The banks have definitely held up pretty well,’ says Campa. ‘That’s partly because they were in such a good position at the start of the crisis, and partly thanks to the support measures provided by governments and central banks. We’ve also seen a drop in non- and late repayment of loans, although the credit portfolio has deteriorated in the business sectors most affected by the pandemic.

‘But there’s a lot of uncertainty about the new Omicron variant. As in the past, it’s best for banks to take a cautious approach. There are other vulnerabilities besides Omicron, such as high prices in the financial markets, strong growth in the mortgage market, and rising property prices.’

Should banks return to more cautious dividend and bonus policies?

‘That was our message back in the summer,’ says Campa. ‘We won’t be issuing another general recommendation, other than advising banks to show caution. They must assess the situation themselves with their national supervisors.’

A new stress test to assess banks’ resilience to climate shocks will be carried out at the beginning of next year. What impact could these climate stress tests have?

‘They aren’t the same as the biennial stress tests organised by the EBA for the sector,’ explains Campa. ‘We won’t be organising next year’s climate stress test either; that will be a matter for the European Central Bank. Earlier this year, the EBA published the results of its survey of around 30 banks, which indicated that they were still highly exposed to sectors not considered sustainable or green. The green asset ratio, the percentage of assets regarded as respecting the climate, was less than 10 per cent. At the beginning of next year, we’ll inform the banks of the information they need to provide on their climate risks. They will then have to indicate how they intend to manage those risks.’

Interest rates in Europe look set to remain low for some time to come. How will that impact banks? And does the low interest rate increase the risk of a property bubble?

‘The low interest rate affects banks in many ways,’ explains Campa. ‘Most importantly, it reduces interest margins, which affects their profitability. On the other hand, it also allows more people to repay their loans, which reduces the banks’ credit losses. But the fact that low interest rates are pushing up prices in the property market is certainly a cause for concern.’

I think it’s important for Belgian customers to have access to a range of banking services across the European Union, not just in Belgium.

Digitisation is forcing banks to reinvent themselves. But bankers complain that strict regulation makes it difficult to compete with emerging fintech operators.

‘Banks certainly have to adapt to new technology,’ agrees Campa. ‘They need to reinvent their business and adapt their office network to the new trends. The coronavirus pandemic has definitely increased the need for them to take more action in this regard.

‘But the sector could soon find itself having to compete with other financial operators on an uneven playing field. We have to make sure that doesn’t happen, so we’re taking a “technologically neutral” approach, which means we aren’t favouring one particular technological solution over another. We look at the risks to the financial system and design the regulatory framework accordingly. We apply the same reasoning to institutions, be it a start-up bank, a large bank, or non-banking operators providing financial services.’

Does the EBA still believe there are too many banks in Europe? And does that also apply to Belgium?

‘The message is that banks have to restructure their activities and boost their profitability,’ says Campa. ‘For some time now, the profitability of European banks has been lower than their cost of equity, and that remains a challenge.’

There are other vulnerabilities besides Omicron, such as high prices in the financial markets, strong growth in the mortgage market, and rising property prices.

‘One option could be for banks to merge, but another could be for the bad banks to leave the market so that only the good operators remain. It isn’t so much that there are too many banks. We have to ensure that Europe has sound banks with sustainable business models. We’ve seen that weak banks can survive for a long time in Europe because no one wants to acquire them or they haven’t been restructured sufficiently. That has to change if we want to make the banking sector more dynamic.

‘I won’t say whether that also applies to Belgium, because I don’t comment on national markets. I believe in a single European market and our primary task is to deliver it. I think it’s important for Belgian customers to have access to a range of banking services across the European Union, not just in Belgium.’

The EBA is celebrating its tenth anniversary. What are its plans for the coming years?

‘Circumstances have changed dramatically over the past 10 years,’ says Campa. ‘The EBA was set up in response to the financial crisis. The banking sector has made huge progress in regulation, transparency and the provision of information. The primary objective now is to create a banking union in Europe and introduce the new Basel III capital rules for banks. At the same time, new technologies must be integrated in a way that best serves customers, while not compromising the stability of the financial system. And we also have to ensure that our banking sector is well equipped to manage the transition to a sustainable economy successfully.’

The interview was conducted by Pieter Suy

De Tijd, 28 December 2021