José Manuel Campa interview with El Pais: I do not think that the tax negatively impacts on the banks’ solvency or on credit

José Manuel Campa: ‘I do not think that the tax negatively impacts on the banks’ solvency or on credit’

The Chairperson of the European Banking Authority believes that those with mortgages on variable rates now have to ‘face higher financing costs’

José Manuel Campa (Oviedo, 58), Chairperson of the European Banking Authority (EBA), talks to EL PAÍS at the Bank of Spain just a few days after the Bank posted its annual results. The head of the European Agency, which has just launched a new stress test for banking entities in Europe, seems quite concerned about messages that are again battering the reputation of banks. He defends the sector, during the interview, but also invites it to modify some of its behaviour.

Question (Q). The Central Bank has just presented its 2022 results with a profit of around 21 billion. Are these earnings excessive, or the return to normal?

Answer (A). The European sector has had returns below the cost of capital for many years. And this is one anomaly that has to be normalised in the medium term. Now we see some Spanish banks with historically high profits. And that, in part, is a process of normalisation. I find it more difficult to define what an excessive profit is, because profits ultimately have to provide an adequate return on capital.

 

Q. But they occur when families are struggling with inflation and additional charges on mortgages. Should banks give distressed debtors more of a helping hand?

A. Banks have to engage with customers who are struggling to meet their financial obligations. And they are doing that. In Spain, the extended Code of Good Practices has been approved with support measures for the most vulnerable. This is a move in the right direction.

 

Q.  What do you think of the proposals to freeze or put caps on mortgage instalments?

A. Vulnerable families have to be helped, because they have had a negative shock on their incomes and have serious difficulties. But the debtors who opted for a variable financing rate, who assumed this risk and benefited from low rates at the time, it is logical that they now have to face higher financing costs. I do not think it would be reasonable to try and find exceptional measures to mitigate this decision that they took.

 

Q. Do the gains from this sharp rise in interest rates represent a windfall of profits?

A. They are linked to the level of interest rates. In Spain, there has been a preference for variable rates in the past, but this is not the norm in Europe. For example, in France the vast majority of loans, especially mortgages, are at fixed interest rates. This change has been seen here in the last three or four years.

 

Q. Spanish banking entities lag behind in terms of solvency, according to the EBA. Is that the big issue that still has to be dealt with?

A. It is a structural feature of the Spanish banking system. It has always been among the lowest and this has to do with the type of portfolios they have. What matters for us and for the regulator is whether this constitutes a vulnerability or not. The best guide we have is stress tests for this, and we just launched tests for 2023. Spanish banks, in times of stress, have shown higher resilience. In normal scenarios, they have small ratios, but they show higher resilience in times of stress.

 

Q. So far, the question of late payments remains controlled, and below 4%. However, despite resilience in the economy and labour market, the entities predict that defaults on payment will increase...

A. Our prediction is that late payments will increase because of how the economy evolves and certain pockets of vulnerabilities that may have accumulated over recent years, and have been propped up by public aid, guarantees or moratoria. These difficulties could raise their heads now. This is why our recommendation is for banks to be cautious.

 

Q. They are urged towards caution, but the payment of dividends has increased. Should they reduce the remuneration to shareholders?

A. I do not have all the clear information on the sector yet because many banks have not published results in Europe. The payout cannot be very high, close to 100 %, they have to leave sufficient margin to absorb losses. The average in the sector is just below 50%, a ratio that I hope will not change much. What we have noticed is a change in the way shareholders are remunerated. There are now more share buy-back plans in addition to cash payment. I think that is good, because in the end the bank’s capacity to adjust how it pays dividends gives it more margin.

 

Q. Entities in Spain have to pay a new one-off tax to cover part of the support against inflation. What do you think of that?

A. The tax was proposed by the Government and approved by the Parliament. It is legitimate. There is nothing more to say. And at the same time, I do not think it has a negative impact on the solvency of banks or the lower provision of credit to the economy.

 

Q. There is another impact that could affect the customer. The legislation says that it cannot have repercussions for the customer, but the ECB invites it to do so. Do the banks have to pass this additional cost on to customers?

A. There are EBA guidelines that are in line with what the European Central Bank says: a product has to pass on costs if it is to be sustainable in the long term. Although with this cost in particular, as it applies to loans already granted, it makes no sense for these loans to be revalued. And since it is a temporary rate, it should not have much impact on new loans either.

 

Q. The commitment to the Banking Union emerged from the previous crisis, but that project has stalled. Should the European leaders re-visit this effort?

A. It is a pity that no further progress was made and it seems that we can expect no further progress in this legislative term. This has implications. There has been a decline in the internationalisation of the banking sector since the previous crisis. And the best way to make sure there is competition is to have European competition, and not just among the banks already operating in a country.

 

Q. And which pieces are missing?

A. The main one is a European deposit guarantee scheme, or similar instrument to assure national authorities that such deposits come under the European Union umbrella.

 

Q. The discussion seems to be stuck on whether or not to limit sovereign bonds in the balance sheet of banks. What is your opinion?

A. The most important thing is to limit the home bias, in other words, that a sovereign bond portfolio is for the most part the debt, generally the national debt, of a single Member State.

 

Q. Regarding competition in the sector, do you think that Spanish banks are too slow to remunerate liability?

A. The competitive dynamics should lead them to remunerate more for savings, and I am sure that this will happen. They may not be competing on deposits, but they are competing with other products.

 

Q. In a recent EBA report, it says that there are 221 bankers in Spain who earn more than one million euros. And of the six highest earners in Europe, three were here. Do bankers in Spain earn too much?

A. What matters most is not the level of remuneration itself. What matters is its structure, the percentage of fixed to variable remuneration. And we check that it does not exceed 100 % of the fixed, that it is spread over time, it is paid also in shares, it is linked to the duties of the director, and so on. Why do they increase so much? Brexit has triggered the repatriation of managers who were in the City and, in addition, the comparison is between 2020 and 2021. And during the year of the pandemic, some banks reduced or even did not pay bonuses. Spain has a multinational banking sector also, and it has central services and managers with global functions based here.

 

Q. The Code of Good Practices was agreed at the end of last year, but this debate has been reopened. Is there margin for new forms of aid? Will this involve increased provisions, or will a broad approach be adopted, as was the case during the pandemic?

A. No, the pandemic was an exceptional situation. The scope was broad because we believed it to be a temporary shock across the economy as a whole. The situation now is substantially different. There are sectors and groups affected by another shock that is damaging their ability to pay and those groups must be actively managed.

 

Q. The BIS and the Systemic Risk Board have warned about shadow debt and crypto-assets. Do you share this fear also?

A. Shadow debt is outside our mandate, but it is a concern for us that it can be financed by banks indirectly, as was the case in the 2008 crisis. It is one of the major concerns.

 

The interview was conducted by Lluís Pellicer Hugo Gutiérrez

El Pais, 13 February 2023