José Manuel Campa interview with Les Echos: Ukraine: ‘We do not think there is a systemic risk for banks’

Ukraine: ‘We do not think there is a systemic risk for banks’

The European Banking Authority estimates the direct exposure of European banks to Russia and Ukraine at almost EUR 90 billion. A moderate amount, according to Chairman José Manuel Campa, who nonetheless urges banks to be cautious.

Does the war in Ukraine pose a systemic risk for European banks?

We make a distinction between direct and indirect impacts. The first is linked to the direct exposure of banks to countries at war. We estimate this at around EUR 75 billion in loans to Russia, and EUR 12 billion in loans to Ukraine, coming to a total of EUR 90 billion approximately. This is a moderate amount, accounting for less than 0.4% of loans in the banking sector. The indirect impact affects European companies with operations in Russia. This is not so easy to estimate but we do not think there is a systemic risk. Of course, the situation must be viewed on a bank-by-bank basis. The European subsidiary of Sberbank, which is in the process of being wound up, is obviously a specific case.

There are also knock-on effects...

Indeed. The crisis, especially if it continues, will have an impact on the prices of raw materials, particularly on energy, nickel and agricultural commodities. This fuels inflation and constrains economic growth, which will inevitably affect banks. However, banks are healthy enough to cope with this shock. After two years of the pandemic, the banks’ capital ratios are very high, higher even than at the start of the COVID crisis. They also have ample liquidity. In our latest stress tests last summer, we found the system to be robust and ready to handle a very challenging scenario.

However, banks have been subject to very large stock market corrections since 24 February. Does this mean that the markets are over-reacting?

We have different perspectives on this. Our diagnosis is that the banking system is robust and able to handle a complex scenario. No doubt investors are focused on the future profitability of banks in a macroeconomic scenario that is worse than it was a month ago. And let's not forget that, if the situation worsens, some banks will face difficulties.

What could happen if Russia defaults?

Even before the issue of a default arises, there are several sources of disruption that we are monitoring at this moment in time. There are some positions that banks must cordon off, if they are able to do so, although this is complex because the market does not necessarily exist anymore. This is the case, for example, with Russian sovereign debt and at present banks in the West are not entitled to negotiate this debt. At what price should they record it in their accounts? We encourage them to be very cautious.

But can we rule out panic in the markets?

This is hard to forecast because of the indirect consequences, which could indeed be significant for entities other than banks, such as asset managers or hedge funds. If asset managers or hedge funds have large positions in Russian sovereign debt, this could indirectly affect banks. This is not easy to forecast at this point, but the effects are likely to be very significant.

‘If asset managers or hedge funds have large positions in Russian sovereign debt, this could indirectly affect banks. This is not easy to forecast at this point, but the effects are likely to be very significant.’

What do you say to banks with subsidiaries in Russia? Should they close down?

We do not issue any formal recommendations on this matter. Essentially, this is not just an issue for banks, but for all companies. There are two dimensions to this, the commercial dimension and the question of reputation. We have already faced these kinds of cases in the past, with sanctions against other countries. Some decided to leave the country, others stayed. Banks are expected to be cautious and to make provisions for their investments in these regions.

Are you satisfied with how banks are applying sanctions?

We have no reason to believe that banks are not applying them and we encourage banks to apply them strictly. These sanctions are very wide-ranging, and numerous, and they have been put in place very quickly. The general attitude is a constructive one. Banks ask us for information and we help them.

Who monitors the application of sanctions?

Sanctions were decided at G7-level and then by the European Council. Their implementation depends on the national authorities. If banks do not apply them, this is a matter for national regulation. I see that Switzerland has decided to apply them, which is quite extraordinary for a traditionally neutral country.

Large banks are by now accustomed to sanctions. This is not the case for smaller entities, such as online banks. Do they have the necessary capacity?

Large entities do have the necessary resources, but they seek to operate under a framework of fair competition with their American or British counterparts. It is important to ensure that the criteria are consistent from one jurisdiction to another. Generally, small entities have a low level of business with Russia. However, there may be some small banks that are very exposed, also through their geographical proximity. This is a focus of concern.

Do the sanctions apply to cryptocurrencies?

The European Commission has been very clear. Sanctions also apply to the business of cryptoassets. This is very good news as the intermediaries are not financial institutions but they are subject to sanctions. As yet there is no financial regulation on cryptoassets, even if the European Parliament has just made a proposal to that effect. But at this stage we have no mandate. It is therefore the responsibility of local authorities to monitor the implementation of sanctions.

Are banks ready to face a probable spike in cyberattacks against the backdrop of war?

This is a priority topic for us, and was even before the geopolitical crisis. We have intensified our surveillance. Until last Friday, however, the information coming in from the national authorities did not point to a significant spike in cyberattacks over the last two weeks.

The interview was conducted by Alexandre Counis, Édouard Lederer, Thibaut Madelin

Les Echos, 16 March 2022