EBA is pushing banks for additional risk provisioning
Mr. Campa, in the early days of the EBA its stress tests drew a lot of criticism as banks first passed the test and had to be rescued shortly afterwards anyway, or important factors like a sovereign default, negative interest rates or a hard Brexit were not baked into the scenario. How does the EBA take a crisis like the Covid 19 one into account in this year‘s stress test?
Our first decision last year was to postpone this stress test to provide some operational relief for banks. Now we have done two things. First we are assuming a scenario that reflects a severe but plausible downturn of the European economy in which we are likely to continue with low interest rates for a longer period of time as a result of the Covid-19 crisis. The second aspect is the methodology. We follow a methodology that in many ways is a standard for previous stress tests but at the same time we take into account that exceptional policies have been putting in place, particularly moratoria and public guarantees.
Do you think EBA has improved in putting together its stress over the years?
I think so. Over the years this has proven to be a reliable and useful tool for supervisory purposes. Early on, it was about identifying areas where there was a potential lack of sufficient capital and there was a lot of debate if there were recapitalisation needs and whether how those recapitalisation needs would be guaranteed. In the course of years, the emphasis has shifted to an exercise that ensures that the capital in the banks is sufficient to provide resilience. And last year has proven that the buffers that were built prior to the crisis have helped alleviate some of the consequences from the pandemic.
In this year‘s stress test Covid-19 is a huge topic. Climate change though is an even bigger one, isn’t it?
We have been running a pilot sensitivity on climate change with a set of volunteer banks but that is not part of our stress test which has a macro scenario over a three year horizon. Due to its nature, climate change is a much longer scenario and requires a different methodological approach. In the first part of this year, we will publish a report on the outcomes of the lessons learned from this first exercise. We hope that this will help us build it into a part of our standard stress tool in the future.
Will there be a separate stress test for climate change or will climate risk become part of the regular stress tests?
We have not decided yet whether it will be part of the next stress test two years from now.
There are plans for a European anti-money laundering authority. Last year the EBA got new competencies in anti-money laundering. Would the EBA like do this job?
Whether we would like to do the job? To be honest, we don‘t know yet what the job is. In any case, this is a political decision of the co-legislators. What would be important is to ensure that the human and financial resources and enforcement tools necessary to execute on it are allocated. At this stage, we are providing advice to the Commission and the co-legislators on the reforms that we need to enhance the AML regulation and supervision across the EU.
Two years ago the EBA had 1.8 eight full time jobs in anti-money laundering positions.
At the moment, as a result of our new competencies we have about 14 people at the EBA working on these issues. Of course, this is not a relevant number if there were to be effective supervision at the European level.
What did EBA do in the last year after it achieved new competences regarding anti money laundering?
We created a Committee representing 57 AML Competent Authorities within the EU to assess policies across the European Union. This was the first time that this was done in the European Union. We oversaw the establishment of 18 AML/CFT colleges across the EU and actively participated in them. Apart from that, we are working on the creation of an EU AML database.
We will try to track intelligence on any ML/TF activities at the European Union level so that we can facilitate the exchange of information and improve the communication across authorities, because one of the key challenges we have identified is that authorities have not been communicating and exchanging information properly. And as a result of that, the risk across the Union has been higher than necessary.
Is this database working already?
At the moment we are working on its design. We hope to have a regulatory technical standard to implement it ready for consultation in the first quarter and to have it up and running by the end of the year. This database is about the identification of potential vulnerabilities that may extend from one member country into other parts of the Union and about an understanding of how prevalent they are.
So will banks have to deliver more data?
No. The intention is to extract the data from the information which is reported by banks. In fact, part of our recommendation to the EU Commission in terms of the reform of the anti-money regulation was precisely to facilitate reporting by banks to be more risk based. Currently, it is a very box-ticking approach and very formalistic. Secondly, we should try to facilitate requirements that enable the same practices across different countries because national rules deviate a lot. And that puts a lot of burden on banks.
Last year the EBA announced it would conduct a pilot exercise of risk assessment of anti-money laundering strategies and resources of national supervisors in 2021. Is this still up in the light of Covid-19?
We published the first report on that risk assessment about a year ago. As a result of Covid we stopped this project but we have joined forces with the Council of Europe and relaunched it in the fourth quarter of last year. We are planning an interim report by the end of this year.
In April 2019, in the aftermath of the scandal surrounding Danske Bank the Board of Supervisors of the EBA decided not to take further action against the Danish and Estonian supervisors. How do you assess this decision? And would the EBA have to change its governance in light of this decision if it were to become the new European anti money laundering authority?
The current Board comprises 28 Member States. This is a standard composition in many European institutions and it works well for the implementation of regulatory and supervisory convergence. The EBA does not really have any individual supervisory decision powers. If there were to be direct supervisory powers at the EBA, then we would need to think about the appropriate governance but that could be worked into the current system.
You have skipped the question regarding the decision in 2019. Was it appropriate not to sanction the supervisors in Denmark and Estonia?
First of all, it was a decision of my Board. So I have to respect that. Secondly, it was a decision that predates my time. I was not participating in the Board at the time so I can‘t really give you any significant insight.That is why I am a bit discreet on that topic. In the Board’s assessment there were two important issues. Firstly, the decision being discussed referred to the application of a regulation that was no longer applicable at the European level. And secondly, the Board felt that the best way was to look forward and think about enhancements and that is when they came up with the idea of implementation reviews of anti-money laundering authorities.
The EBA is turning 10 years old in 2021
That is a big milestone for us and I think we have made a huge amount of progress. A big part of our work was dedicated to building the Single Rule Book, enhancing the capital and liquidity position of banks and increasing transparency. That cycle is now more or less levelling out. We are finishing it up with the mandate for the revision of the CCR2. But as we go forward, there are new challenges.
Climate Risk is one of them. The ESG agenda ten months ago was mainly focused on climate issues. And I think those are very important and they will remain. But I think the challenges for us and the banking sector are broader. Social sustainability and Governance are important as well. Last quarter we put forward a consultation on ESG risk management by banks and will come up with guidelines later this year. And next month, we will be putting forward a consultation on ESG disclosures by banks. It is important that banks disclose what their positions are and where they think they will be in the future.
A second big area is innovation and how to incorporate innovation into our regulation. We have been putting a lot of effort in the area of payments and there has been progress. We also played a very active role in the digital strategy of the Commission in pointing to areas where we felt there were holes in the regulation that needed to be addressed. And we are happy to see a lot of those vulnerabilities have been taken into account in the Commission’s proposal. And third, we also need to make sure that we are good at assessing whether there are new risks for financial stability arising from the technological transformation.
For instance we highlighted concerns on potential risks arising from concentration in the provision of cloud services to the financial sector. And the Commission’s proposals under its digital strategy address that. Beyond technology and innovation, I think conduct risks will also continue to be a concern.
What does the EBA do about it?
As you know, the European regulation on areas of conduct is still very much at the national level. So this regulation may need to be enhanced. We have issued a communication to banks in the context of the COVID pandemic to highlight these concerns. At the same time, we have recently been communicating to customers, consumers and citizens more directly on issues related to Brexit, payments and new products. The sensitivity of citizens in the Eurozone remains high. Our mandate in the conduct area is limited at this stage, so we are pushing forward as much as we can within this mandate.
Talking about financial innovation: is there a need for bank supervisors and regulators to come up with some action on positions in crypto currencies?
We already issued a number of warnings, already back in 2018, on crypto currencies, some of them to consumers, making them aware of the high volatility. We also issued recommendations to bank institutions and payment institutions to discourage them from holding this type of assets in their portfolios and recommending these assets, at least broadly, to their client base. Our view is that so far, banks and payment institutions have been very careful about the use of these assets so that the prevalence of these assets remains contained. It is also important that the nature of these products is changing as you can see with Libra. So regulation has to change as well. That is why we are very happy with the specific proposal that has been put forward by the Commission to regulate crypto assets.
Is there a need to develop capital requirements for banks holding crypto assets yet?
We have to wait and see how the cryptocurrencies are developing. However, according to the current standards, banks need to do a proper assessment of those risks and allocate capital accordingly anyway.
What about putting a simplification of banks’ reporting system on the agenda as a challenge for the EBA in the next years? Bank are complaining for years about a burdensome and highly inefficient system. The SSM Chair, Andrea Enria, recently said they have a point.
I think that is a fair assessment. Reporting requirements are not as efficient as possible. So we need to work on that. At the same time, technology is offering new opportunities. At the moment, we are going through two different mandates, which we think are relevant. One is a mandate to decrease reporting requirements for small and not complex banks by at least 10 percent. In the first quarter, we are putting forward a report for consultation on how to achieve that. The second one is a request for a feasibility study of how to do integrated reporting. We should work under the principle that if a bank provides information on a particular number, ratio or whatever to one supervisory authority within the context of the European Union, that number should not be requested by any other authority to the bank again. There should be a way for authorities to collaborate and share that information. We will come forward with a consultation on this feasibility study in the first half of the year.
The ECB came up with the idea of such a Banks Integrated Reporting Dictionary in 2015. Since then not much has come out of it. So what is your time horizon?
There is a fair enough consensus that having a dictionary is one of the goals. That is likely to be one of our key proposals in the feasibility study. It makes a lot of sense and I certainly hope that there will be an agreement on that. But building the dictionary will be a medium and long term project.
In the USA, the Federal Reserve is taking data cubes from banks and with these it is calculating its stress tests themselves. Is that something you would like to do too instead of having banks reporting their stress test data over the course of six months in 2021 and delivering them in four different batches?
I think this is one possibility. However, whether the authorities retrieve the data directly from the banks’ systems or the banks submit the data to the supervisory authority is more about the mechanics of how to execute. What is important is that we agree on what data we ask to the supervised entities and once we have the data, we do not ask for it again.
Would you like to do non-public stress tests? In the past some supervisors have regretted they were not able to put extreme scenarios in public stress test designs as this would make market participants nervous.
I think the last decade has shown that there is good value out of the public stress test exercise. It puts some limits on the plausibility of the assumptions, it also provides some transparency, useful information and a level of confidence to the broader community on the status of the banks in the exercise. The stress test has proven very useful for stakeholders beyond the bank and the supervisor, for example shareholders, investors and consumers.
In the course of the pandemic, the volumes of non-performing loans are supposed to be rising steadily.
We should expect an increase of NPLs over the medium term in the banking sector but it is a bit uncertain how that will happen in different parts of the union though because there has been very exceptional fiscal measures put in place. You know, we had a long term plan on managing NPLs already prior to this crisis to decrease their stock at the end of the prior crisis. NPLs have been reduced but that process proved to be difficult and painful. So it is important that we are prepared. As part of the Commission’s new NPL action plan we are working with them to facilitate templates for a better communication on the characteristics of NPLs and to enhance the regulation of securitization.
EBA Templates for NPL have been around for some time now but there has been a lot of criticism that there were simply too many data asked not everybody could fill in. Will you have to trim them down a bit to make it more palatable for market participants?
It is true that there has been criticism but the views on the current template differ depending on who the user is. For investors they tend to be okay with the information disclosed as they rely on the information from banks. The banks, though, which have to provide that information would rather have less reporting. Going forward, it is not only about the amount but also about the type of information that needs to be disclosed. In light of Covid-19 there are new pieces of information that can be relevant, for example if there are public guarantees or moratoria attached to each NPL and depending on what their characteristics are. Hopefully we will be able to resolve some of the previous criticism.
This week the SSM Chair, Andrea Enria, considerably raised the pressure on banks to address their credit risk. What can banks expect from EBA in that regard?
Obviously, the shock to GDP last year was so high that the level of NPLs and the provisioning we have seen so far is low for what the models would tell you - even if it is true that the shock was temporary and is likely to be reversed. In the medium term, this will need to be adjusted. So I think it‘s important that banks do proper recognition of how they see risks going forward. We are sending this message strongly. For example, last December, when we extended our guidelines on the use of moratoria we clearly said that they only apply for moratoria that do not go beyond nine months and that banks need to do individual assessments to see if risks have changed during these nine months. I think the stress test, as we go through it, will also help us put focus on potential problems if there is not a proper assessment of those.
The interview was conducted by Bernd Neubacher and Tobias Fischer.
Börsen-Zeitung, 28th of January 2021