José Manuel Campa's interview with the Irish Independent: ‘I’d be happy to see Spanish banks serving Irish customers, and the other way round as well’

Date : 01/04/2021 |

‘I’d be happy to see Spanish banks serving Irish customers, and the other way round as well’

EBA chair believes believes legacy of 2008 crash is ‘eroding over time naturally’

How will banks handle potential insolvencies (NPLs) and what are their exposures? Can you tell us about the context and timing of the EU-wide stress test in the post-Covid setting?

In terms of the timing of this year’s stress test, we launched it at the end of January and we are now in the middle of receiving the first assessments from the banks. We will then go through the quality assurance process and we will be publishing the results late in July. There are fifty banks participating. The exercise is very important this year for three different reasons. The first is because, as you may already know, we were in the middle of doing the exercise last year when the Covid crisis hit. The first thing that we did at that time was to cancel the stress test because we thought it made sense for banks to focus on managing the stress situation rather than replying to us in a hypothetical manner. We normally carry out the exercise every other year and the last one we conducted was in 2018 – so it would be three years this time since we last conducted a stress test. The second aspect, of course, is that the pandemic, so far, has been reflected very marginally on the balance sheets of banks with the data that we have as of the end of 2020. What we observed is that banks’ capital positions have actually increased in 2020, mainly due to some of the measures that they took and some capital regulatory relief measures. They have good liquidity and the overall ratio of non-performing loans has shown a declining trend in 2020 as well. So, although we do see economic disruption and GDP declined last year, this has not hit banks’ balance sheets, partially due to the moratoria, the public guarantee schemes and many other measures put in place by authorities. The third aspect is that in our stress test, as you know, we run a macro scenario, which is mainly the projections from the European Central Bank. Then we run an adverse scenario, with declining GDP, which is very aggressive for this year. The results will provide us with more insight on how those measures will filter through in the recovery phase. Hopefully by July, if the vaccination programme continues effectively, we will be in the recovery phase and this will help us plan for that recovery phase.

On the vaccination rollout plan, we all know very well the kind of political issues around that, but in terms of the effects on banks and the economy, how important is that in the stress test? Have you factored it in somehow? Do you have scenarios that depend on that?

This was not factored in because, based on the methodology underlying the stress test, the information banks provide is as of the end of last year, December 2020. So, we look at the banks’ positions in December 2020 and we ask them to project their expected non-performing loans given the outcomes of the macro scenario and also the effects of the public guarantees and the moratoria. But we don't have specific hypotheses for that. We just have a central macro scenario and an adverse scenario but of course, as you know, the vaccination policy is the best economic policy because, at the end of the day, the economic restrictions we were confronted with are driven by the health threat. So, resolving the health threat is the best solution.

One of the things that finance ministers have been talking about in the last Eurogroup and Ecofin - but especially the Eurogroup, was how to judge viable versus nonviable companies and how that will affect banks’ NPLs. In addition, I am wondering what you think about that judgement, who should make that call? Is it up to banks now to be the ultimate arbiters of viable and nonviable firms? What do you think about the level of NPLs they could possibly face and how that might affect their balance sheets? 

Going forward, it is very important to understand which firms are going to be viable in a post-Covid world and which firms have been damaged, either because of the short-term impact or because of the structural changes that may come from Covid. What we have observed is that right now there is an increase in leverage and debt, and that companies need to manage it going forward. In addition, it is very important that our assessment is done properly. It is very difficult to assess while we do not have clarity on when the recovery phase will take place. For example, last year’s summer was a very bad season for tourism and this summer it is still a bit uncertain as it depends on the evolution of the health crisis. Therefore, to make a viability assessment, this is a very important piece of information. So who should be doing that? Financial experts. The banks have a role to play but they are not the only ones, because many of these companies may not just need lending but also equity. Investors are important participants, as well as managers. The point for us is that this depends on the insolvency regimes in different countries and that is national in nature. We have to be careful to ensure that these insolvency regimes do not overly deplete the companies. Too many companies have to go through bankruptcy or liquidation rather than restructuring. In terms of the impact that this might have on NPLs, we performed a sensitivity analysis early on in the crisis, in June. We have seen that under very demanding conditions, the worst case scenario (and we are not in that situation as very exceptional measures were put in place by the governments, such as the public guarantee schemes) would lead to a deterioration of capital from 250 and 380 basis points, to 2.5 and 3.8 percentage points. That was within the limits of what we consider to be the management buffer, which is the capital buffer that banks have above capital requirements, which by the end of 2020 was 530 basis points. Therefore, figures of 250 to 380 versus 530, show that on average the system should have sufficient capital to absorb the projected NPLs. Of course, the problem is that the average is just the average and there is also a distribution issue, so it does not rule out the possibility that there may be some banks that are more affected than others because of their business models, or because they have lower historic levels of capital. Overall, we think that the system has more than enough capital at this stage.

There is a view, at least in Ireland, that EU rules or EU regulators prefer selling or getting rid of non-performing loans rather than working it out case by case with borrowers, whether they are SMEs or whether they are mortgage holders. What is your view on that kind of argument? Should NPLs be cleaned away or should banks try to deal with their customers?

Those views are extreme. What happens is that the investor that buys the NPLs will have to manage each of them with the borrower to be able to recover that loan. Our view, and this is the experience from the previous crisis as well, is two-fold at this point. Firstly, active management is very important – meaning the recognition by banks of loans that are not likely to perform and therefore, likely to become an NPL. This process is an important part of managing the crisis. We know from experience in the last crisis, that kicking the can down the road or just keeping firms alive that do not really have viable business models - just keeping them and pretending that they are performing – does not help. It just postpones the problems. Now, active management is two-fold. The banks must first recognise the loan that is likely to be non-performing, and then the second aspect is to actively manage that loan. Active management of the loan has two parts, as you mentioned. It could be that the bank deals with the customer on a one to one basis, or it could be that it has accumulated a certain amount of assets of that type that are no longer efficient for them to manage them and they need to pass it on the market or to other specialised investors and sell them. The important thing is that there is active management, which could be on an individual basis or through the sale of the NPL portfolios. As an example, the previous financial crisis led to a large accumulation of NPLs on the balance sheets of banks, which has been actively managed. Therefore, the ratio of NPLs in the EU has dropped by more than half between 2015 and today, and that has helped to improve the situation of the banks in this crisis.

I think your predecessor, Andrea Enria has talked about bank capital reliefs. It is almost like a reward - what you would call early recognition. Provisioning for NPLs and getting themselves prepared for what is coming in three, six or eight months’ time, is that something that the EBA would be in favour of? Like capital rewards? Or being able to use capital buffers to enable that provisioning?

This is an important parameter and we are supportive of this idea. Last year, there were regulatory measures adopted that resulted in low capital for banks to have bigger capital cushions. This includes low capital requirements, countercyclical buffers - and the goal is for those buffers to be used. The buffers can be used essentially for two activities. One is to recognise losses as they arise and the second is to ensure that there is adequate lending provided to the economy. Both of those things need to be done properly. Our concern right now is to make sure that the banks use the buffers for these purposes and I think that Andrea was highlighting the aspect of those credit losses that need to be recognised. Let us recognise them and if those buffers become smaller, his message is not to worry as time will be given to banks to rebuild them as the recovery phase develops. We will make sure that the banks use the buffers for those two goals: recognition of losses as they arise early on, and to provide lending to the economy as the recovery phase continues and expands. 

Something that Andrea Enria had talked about and that the ECB has given guidance on is about paying dividends during Covid or before you've actually done this NPL provisioning and bonuses. What's your view on the payment of benefits to shareholders and bonuses to staff in the Covid-19 environment - before we know the full impact on banks’ balance sheets?

The message here is prudence. As you are probably aware, last year we issued a recommendation that dividends should not be paid out and the national supervisory authorities followed up with banks, so there was no payment of dividends. As we go forward, there is a regulation that some dividends can be paid out. In the case of the ECB’s recommendation for the Banking Union, about 15% of profits can be paid out in dividends. Our view, and this is for the whole EU not just for the Banking Union, is that prudence is really important and banks need to remain focused on the distribution of capital because, as I said before, those capital buffers are there to be used to sustain recovery and absorb losses if needed. 

I want to talk a little bit about capital requirements because the Irish banks are the most highly capitalised in the EU. Because of the legacy issues, they continue to lend at very high rates, so it is just difficult in Ireland to get a mortgage and to afford one. It is a bit of a catch 22 because you have healthy banks, but they are not really lending to the economy in the same way other European banks are lending. They have very expensive rates, which prices many people out of the housing market. In addition, I mean, let us not even go into the Irish housing crisis yet, because that is another story. I am just wondering what you think about that because I have spoken to some experts in Ireland who think that possibly the EU rules could change so that you do not account for legacy debt in the same way anymore. It has been 10 years since the last crisis. Is there a way of freeing up banks' legacy assets in some way to allow their capital buffers to come down and therefore allow them a little bit more flexibility and freedom to lend?

It is true that the average net interest margin that includes not just mortgages but all lending in Ireland is higher than the European Union average. However, it is also true, as you mentioned, that the NPL ratio is also higher. You have to think about interest rates as a compensation for risk. So if the risk is perceived to be higher, prices were also seen to be higher, so it is a forward risk adjustment. My perception is that there is a history built into the models and pricing from previous crises or from previous experiences, which is true in some other models. Some models use time series. So if in the past there was a crisis - like there was – it builds into the model, but my sense is that this is eroding over time naturally. The crisis happened 10 years ago, and because a template uses data for 10-15 years,more weight should be given to the more recent years rather than earlier years. The impact of the previous crisis is likely to be eroding away and this problem assessment is the risk return reward assessment.   

The other issue with the Irish banking market, Mario Draghi said it a couple of years ago as a quasi-monopoly, we have three, but if you want to stretch it, five banks in the market, one of them is exiting Ulster Bank, which is a NatWest company. Another of our main pillar banks, Bank of Ireland is closing many branches. Now that has not necessarily to do with the same thing, this is kind of digitalisation. However, with such a small banking market, is that a good thing or a bad thing from a regulatory point of view? 

Well, from that perspective, to be honest, we are the European Banking Authority, our single most important mandate is to improve the promotion of the Single Market and the Single Rulebook within the European Union. Therefore, for us, the most important aspect is not how many local players there are but whether we have an effective market in the European Union that fosters integration and competition. In addition, I would say that in other ways Fintech is playing a very dynamic role in bringing competition to many other financial products. So my impression is that this dynamic will work more in favour of fostering that competition over the medium to long term, regardless of whether you have two or three purely domestic players and effective competition with the European Union. I think this is actually a very important aspect that will likely play out. As the EBA, it is very important for us to see an effective EU market. We would like to see the degree of cross-border banking increasing as well as cross-border lending. I am from Spain, so I would like to see Spanish banks actively providing services to Irish customers and the other way around, for me that would be the best way to think about it - rather than thinking about an individual bank leaving any domestic market.

In that sense because you mentioned the EBA’s role, do we have an effective European market yet?  If we do not, what steps do we need to take in terms of the Banking Union and other things to make that happen? What is the most important thing you can do as EU regulators to make that happen? 

Banking in that sense is special, because we do have a Single Market for the 27 Members of the European Union, as in many other aspects of our economic activity. At the same time, we do have a Banking Union, but for a subset of the 27 Members, with Ireland’s participation. Ireland is a Member of both the Single Market and the Banking Union. Therefore, we believe that integration is possible. I think this thing about the progress that has been made since 2014, since the creation of the Banking Union, has been helpful, but as I said before, I think that we need to make sure that there is more cross-border banking activity. There is less of that and we do see that there are still a number of issues that need to be addressed. The most obvious one is the completion of the Banking Union by finalising Deposit Insurance. It is also important to clarify parts of the resolution and recovery regime so that it is homogeneous across the Union, and the third aspect relates to other pieces of integration that may be important for banks, such as taxation, disclosure and conduct, because all those things remain national. Of course, the effect of this is much broader than just the financial industry and areas in which we need to work. It is fair to say that when we talk to bank executives about the issue of consolidation, cross-border banking and the kind, they tend to think that synergies and the business case for significant cross-border consolidation is still low, and that more needs to be done. For us, this is the message that we must continue to give: finish the Banking Union, clarify the recovery and resolution framework and make sure that we eliminate all other barriers.

The European Central Bank issued guidance last year on banking consolidation and they said it can be a good thing in terms of economies of scale, but you mentioned that the business case is not necessarily there. In your view, do you share that ECB view that the banking consolidation is a good thing that we should have more of?

It is better to think first about what the problem is and then think about the solution. To me, the problem is that there is relatively low profitability in the banking sector in the European Union and there are inefficient pockets of excess capacity and that need to be managed. One way to manage this issue is through consolidation – but it is not the only way. Banks can be very active in making the way they service their products more efficient, such as enhancing their cost efficiency, and consolidation is one of the solutions. It is a solution that helps that problem but is not in itself a goal. It is a means to solve the problem, which is building more effective banks. So it depends on the business model that the consolidation puts forward. When two bad banks are merged, it is unlikely that you are going to get a good bank. If it is a good project, a good and sustainable business model then that should be promoted. What I do think is important and, that's the way I view the guidelines issued by the European Central Bank, is that there are no barriers to those good business models being developed - neither regulatory barriers nor supervisory barriers. If a case is put forward that makes sense from a business point of view, which is sustainable, it should be allowed to go forward, unless there is a risk. It should be encouraged to go forward because it fosters competition and we need to make sure there are no barriers that prevent this from happening. 

Where do you see the pockets of excess capacity and low profitability in other areas? Where do you see those two things in the European-banking sector now? 

It is difficult because unfortunately we do not have a single bank or single behaviour as we mentioned previously in relation to Ireland. We know that in certain national markets consolidation is taking place and banks are exiting at a much faster pace. Ireland went through a large process of restructuring – which was during the financial crisis. My own country, Spain, went through a large process of consolidation and many companies exited changing the business structure. Therefore, there are countries in which that has happened, there are countries where it has happened less, and, therefore, this is one area for further restructuring. However, I would say that beyond that there is also a general trend, which is technology and digitalisation, and this is happening across the Union. After Covid, all banks are thinking about how they distribute their products and how much they need their existing physical branch networks. I think all this is becoming endogenous as result of those two trends: existing collective capacity adjustment and transfer technology.

I wanted to talk about the Commission’s proposals earlier this year on NPLs and on the idea about asset management companies, and I wonder what your view is particularly on that second point. Ireland had or still has one which has had varying degrees of success. It has been very controversial here because many people see it as having perpetuated the housing crisis. Having sold the land and the properties they had to vulture funds and created a shortage of housing. Problems in Ireland date back way before that and I think as a Spaniard you probably have similar issues in Spain, but I am wondering, what is your view on asset management companies? Should they be national or pan European? What should be their main features? Are you in favour of that kind of model? 

Asset management companies in itself is a very useful tool and it should be one of the tools in the ‘toolkit box’. From the previous crisis we learned that there are certain features of asset management companies that are more likely to be successful than others. For instance, independence in management, professional management and the importance of making sure that there is clarity on the price and the types of assets that are being bought and the speed at which those assets need to be disposed of to ensure the most efficient transition, as in the case of Ireland. In the case of Spain, in the previous crisis, these assets belonged to the real estate sector. As the current crisis develops this is not necessarily the case. It is likely that NPLs in this crisis will be of a different nature. We cannot say that prior to the crisis there was a bubble building up in any particular part of the industrial productive capacity of the European Union as a whole, or even within EU countries. Therefore, we should not extrapolate to particular sectors because the asset management companies in the future are likely to have different assets and NPLs to those of the past. However, we do think that all asset management companies need to have the ability to fund themselves in the markets and to offer access to the markets in a standard way - and a deep market is useful for that. That is why we favour having a European asset management company, or at least common rules and common standards in the management of those asset management companies, so that we can foster access to the deeper market. Coming back to the Single European Market, I am aware that it is aspirational, but to have a European or homogeneous network of asset management companies that help generate the secondary market would be useful. 

Are there any national asset management companies in existence at the moment that you would look to as the kind of best practice or good examples of how such an entity should function? 

I think that some of them have good characteristics, such as those in Ireland. Those in Spain also have some good features. There were some cases in northern countries of bank-specific asset management companies. As I said before, knowing how to properly assess the assets that are being transferred to the asset management company, knowing how to make the business plan of that asset management company consistent with being able to manage those assets over time in an active manner and without flooding the market, having access to financial products and finding proper management and independence in management - these are all characteristics that have proven to be useful. 

A bit of a philosophical question. The Financial Services Union in Ireland and a couple of other politicians have suggested that Ireland should hold a forum on the future of banking. The trigger was the exit of Ulster Bank from the market because it caused an existential crisis here, like what are banks for? How many should we have? Are they functioning as they should? In addition, one of the aspects that the Financial Services Union wants to look at is European regulation and how that has affected it. Are you in favour of such kinds of forums? To think more philosophically about the nature of banking? Would you be willing to participate if you were asked to participate in such a forum?

I think it is an essential part of our work, to think about the future, to think about how this industry is going to behave in the future, to be able to serve companies and citizens, which is the ultimate goal. Previously, I mentioned digitalisation as one of the big challenges and talked about how it is affecting the industry. This is an important aspect for us and to go even further, innovation is also important. We dedicate a great deal of time at the EBA to thinking about how innovation is affecting the provision of banking services in our societies. We like to say that we would like to be technologically neutral. We do not want to be biased towards any particular technology built by new players or built by incumbents. What we care about is making sure that it provides the right service and that it does not engage in disproportional risks, such as systemic risk or unexpected risks, which range from conduct to financial crime, financial stability risk or even operational risk in terms of cyber security and things of that sort. Therefore, this is a very important debate for us, and to be honest, the challenge in Europe is two-fold. The first is technology and the second is the underlying transformation of our productive capacity in terms of sustainability. Making sure that we have financial sectors that are capable of allocating finance in that context. You say it is philosophical and I agree with you. It has a philosophical component but it is also very practical because it is going to affect the way we live our lives.

You talked about digitalisation, do you think the future of banking is digital? I asked just because one of our main banks has announced the closure of more than 100 physical bank branches and many people are really just frightened about this. But the reality is, especially over the last year because of Covid, people are not going to the branches in the same way. The other factor is that there is a certain proportion of the population that still uses bank branches and they do not have the same digital skills. So, is digitalisation all good? 

That is a very good question. I think we see that digitalisation is probably unavoidable. We are moving towards more and more digitalisation as we go forward. The question is, how do we manage this in a way that helps prevent the potential financial exclusion of our citizens? Meaning that more marginalised people could not have access to financial products, or people who are not digitally-proficient or who live in rural communities and the local branch closes. I think that this is one important aspect and as we go forward, we need to manage it. However, as I said, digitalisation is inevitable. How do we use it to our benefit? It does not necessarily mean that we are going to be 100% digital. For instance, banking has two components, which are fundamental. One is the provision of services - the service industry - and the second is the advisory part. Both are issues that involve people. We often receive advice about the type of service we would like to receive in the context of financial products. I think those two components will remain in place and that there is a very important human aspect to them. Whether we can provide advice online rather than holding a physical meeting - that is likely to happen and has already happened on a mass scale since last March. 

One of the things that banks struggle with across Europe, but especially in Ireland, is that digitising their systems is very difficult because they have these legacy IT systems. Therefore, they cannot compete with the new players in the market in the same way and they cannot handle new types of assets in the same way, they just do not have that reflex to be there. They are not quick, they are not flexible. I am just wondering what you think about that? How can banks compete against their newer financial Fintech competitors?

That is true. There are these legacy systems and ways of doing things that need to change and sometimes change is harder for someone who is used to doing certain things than it is for somebody who is learning it for the first time. However, at the same time, incumbents have many other advantages. They know their customers. They have been providing them services for many years. They have information, they have their know-how, their branches in some cases are helpful, and so they need to make sure that they adjust in those terms. For them, it is important to help and provide customers with the services that they need. For instance, there are banks that have more of a traditional customer base, which is even demographically older, and they might be slower to move into digitalisation than banks that are targeting younger demographics or newcomers to the financial industry. What is important is that every citizen in the EU gets the proper service. That would be my goal. Of course, this does not necessarily mean that every citizen needs the same service. There is a service for their own needs. 

One of the other offshoots of digitalisation that I have been interested in recently are crypto assets and many central banks in the EU and the European Central Bank, and the EBA are taking part in this kind of reflection on cryptocurrency regulation. What is your view on those assets at the moment? Are they dangerous? Especially the fluctuating prices of Bitcoin over the last three months. What is your view on those assets? Should banks be getting in on the game or should they be more risk averse in that respect? 

I am going to answer this question in two parts. First, in regard to the regulatory arena, where we issued a Joint Communication with the ESAs to the Commission a couple of years ago, in which we say that we are concerned about the regulation gaps in the area of crypto assets. There are some assets that could be considered investment products and some that could be considered electronic money, but many others actually fall between the two and there is a gap in the regulation. Therefore, we think that the EU regulatory framework needs to be updated to take those into account. The Commission has put forward a proposal, which is being discussed. We are sympathetic to the proposal, we think that it is going in the right direction and we hope it will be implemented.  This is about the regulatory framework. Coming back to the previous discussion, it does not mean that we do not want these assets in Europe. We want to make sure there is a regulation that controls the potential risks that innovation is bringing. We are following the current situation carefully, looking at how investment in existing crypto assets has evolved across the European Union, and we carry out regular assessments with the regulatory authorities. It seems to us that banks do not invest in these assets and they do not advise their customers to actively invest in these assets either. We are not seeing significant investments by banks in this type of asset and we do not sense that this is a concern in terms of their financial stability. At a retail level, we issued our Recommendation earlier this year, in which we continue to inform consumers that these assets are perceived to be highly volatile, risky assets, and that they should be very careful about investing in them because there is a probability that they might lose a large amount of their investment. 

Would you favour a direct European regulation of crypto assets, for instance by the ECB? 

According to the existing proposal, the ECB will release an opinion on crypto assets that are being issued, whether it thinks this is affecting the transmission of monetary policy or whether they have monetary policy implications. The problem that we have with these assets is that they are very diverse in nature. We call them ‘crypto’ assets, but the ability to innovate and make them with different features is very high. This is not a standardised product, so I think it is important to have a regulatory framework that will cover the whole range. As I said, the ECB will issue an opinion. I think this is absolutely right, and that it should be done.  

I think the ECB in one of the opinions that it wrote about the Commission's regulation, said that it wanted to have more power to approve or not.

In the initial proposal it was suggested the ECB could issue an opinion if it had an implication that could be detrimental to monetary policy. That opinion was not binding for the approval and ultimate decision on that asset and the ECB would like to have a binding opinion.

Would you support that call?

It should not be a blank check for the ECB. If it is narrow, and the ECB makes a well-argued case, then sure. It is clear to me the ECB has the mandate on the transmission of monetary policy, at least in the Banking Union. It should be the only one that has that mandate.

Can we move on to talk about ESG? In addition, sustainability, because this is the issue. I mean if you talk to any banks, any investment funds, they all say all of the ESG rules coming down the line from  Europe are the biggest body of  work they have to contend with. Many people are very excited about it because for instance, take the Irish for example, if you have to retrofit many tens of thousands of homes that provides, you know, an investment opportunity? So the banks get very excited about this and are going to lend loads of money to people to retrofit homes. However, on the other side of that, I am wondering if EU legislation could potentially stop banks from doing certain lending? Could that be one of the outcomes, like you can no longer lend to certain polluting industries? You could no longer give a mortgage to a customer for an old home that they do not plan to retrofit? 

Sustainability challenges are the number one priority for the European Union. In addition, its nature does not affect financial problems. It is not an issue specific to the financial industry. It is about the transformation of our productive capacity and the way we do things in general in our societies. The role of the financial industry is to make sure that financing is being allocated properly to the activities that will have a future and, I would say, taken away from the activities that are perceived not to have a future, and that is the role of the banking sector. Therefore, in that sense, banks, as part of this chapter, are really a transmission mechanism rather than the ultimate goal, which is the underlying transformation of the productive capacity. In my opinion, the regulation in the banking sector should not be more than a channel, except maybe make the pipes for the channel as smooth as possible. I do not think that the regulations in the banking sector should determine whether we invest or do not invest in a particular industry. That should be determined by the underlying perception of the sustainability of that industry or type of activity. The comment I also hear from banks is that of course the understanding and transparency of information that is being provided to them is very limited. How do I know if a particular house, or particular project, or particular industry is going to be sufficiently green or not, unless I have very detailed information on the activities being performed on that front? That is why working on the disclosures and taxonomy is so important. We have put out a consultation paper on Pillar 3 disclosures by banks, on the types of exposures that they have in their balance sheets. This is under discussion and we hope to have the final requirements by the end of the year, so that banks can start disclosing next year. It is a first attempt from outside. We realise this is partial, very unusual for us and we do not ask for very specific disclosures. We ask them to provide ranges, for instance, and in some cases to define the type of exposure and the types of industries, in a narrow sense, because we do not necessarily have, at this stage at least, the magic world of perfect classification – this is a work in progress. Last year, we had another consultation paper on guidelines for the governance of ESG issues, to make sure that the banks have proper governance when they think about making loans or making investment decisions over the medium term, in terms of the sustainability implications, and what kind of banks they would like to be from a sustainability standpoint, what guidance they provide to their decision making committees, risk committees and investment committees. I think that governance and disclosure are very important for people to have a good understanding of where they are going. 

There was a consultation paper you issued at the beginning of this month which talked about green asset ratio. How could that potentially impact what kind of lending banks can do? Could you see restricting lending in certain sectors if the objective is green lending? What about the rest? 

This is one example. We put forward a green asset ratio and, if I might say, the devil is in the detail in terms of how to define it. However, I think the key message here is the same as the message relating to capital ratios. As you can imagine, within the EBA and within the industry, we have had hours and hours of discussion about what the numerator of the capital ratio is and what the nominator of the capital ratio is and how you compute those two numbers. This is what will happen with the green asset ratio. There will be endless discussion about what is green, what is not green and what is light green. We can talk about the 100 shades of green but the important thing here is to signal the direction. This is an important piece of information that we need to focus our discussions on, and as I said before, in this consultation paper, we are willing to allow banks to provide ranges or narrowly classify what they consider to be green or not green to use in a ratio. But at very least they should disclose what they put in there and then the people reading that information can make their own judgment as to whether the bank is making accurate assessments or engaging in wishful thinking in terms of what it considers to be green or not. I think that this process of conversation is really valuable.

So on Friday we heard from the UK Treasury that the talks on a memorandum of understanding have concluded that we are about to sign this new MOU. I'm wondering what you think about that because there are existing types of agreements in place with other jurisdictions, and I'm wondering how you know whether those are useful? I know that it is a separate decision, but the Commission is supposed to come forward with some decisions on equivalents and there will be individual decisions and it is the Commission's responsibility and all that, but I am just wondering what you make of that MOU? Is this a good thing and what you hope for collaboration with the UK authorities post Brexit? 

It is generally very good news, as in the end we do have to engage with the UK, we want to engage with the UK and it is a very important part of us. The UK is outside the Union and the key component for any kind of engagement with a third party is the memorandum of understanding. To ensure solid bilateral relations with the PRA and the FCA with this programme, they had already signed a memorandum of understanding which is very specific to our particular needs and that is the starting point, as you say, for the second, probably more important, decision, which is the current decision on what is perceived to be equivalent. However, the memorandum of understanding goes beyond equivalence. It sets the framework for collaboration, a framework that it has already been tried and tested. The European Union has similar frameworks with the US and with other large jurisdictions, which they regularly engage in. That is very good news, knowing that the memorandum has been signed in a relatively timely manner, because it shows that the spirit of cooperation is there and it is good. We will undoubtedly have a deep relationship with the UK in the financial sector for many years. 

The expectation is that these equivalence decisions will not be wide ranging and cannot equal single market membership, it cannot equal a passport. However, would you favour something more ambitious in terms of equivalence? Like how does it impact what you do as a European regulator not to have that certainty yet? 

In terms of uncertainty and disruption in the short term, I would say that this has been managed and is not really the challenge. The key component of this equivalence decision is the way forward and how we monitor this going forward over the years. Because, and I think the Commission has made this point a number of times as well, the situation with the UK is very different from the situation with many other countries. Usually you start with this decision with countries whose regulations are different and the goal is to try to converge. If that convergence takes place it is essentially equivalence, and I think that would go with the need to converge, and it is good news. The situation here is completely the opposite. We are starting from the Single Rulebook, with the expectation that it will likely diverge from that same initial rules for everybody, for the UK and the EU. The question is how much it will diverge. This is where the key component of the debate lies. From the EU perspective, or at least from my personal perspective, what I would like to get is assurances that although some divergences may occur over the medium to long term, the expectation is that those divergences will not be substantial or will be manageable through proactive collaboration and engagement. It is more about where the forward-looking trajectory is going and I think that this will be the part the Commission will find difficult to assess. This is logical and at the same time both the EU and the UK may not know exactly what the future looks like, and as we know we are likely to diverge, we cannot be too pre-committed about which way we are going.

One of undercurrents in the UK is the idea that the EU wants to grab back financial services. For instance, all of those shares that moved across in January to trading centres here in the EU.  Legally, they have to- if you trade in euro, you have to be in the Eurozone. What is your assessment of that? Is the EU trying to make a grab for the UK's piece of the UK pie and financial services and has it been successful? 

My perception is that we are working with the assumption that we are a Single Market which could operate with London in particular and the UK as a whole within it. Right now, we are a Single Market operating without the UK and we need to make sure that we have a robust Single Market and provide services to cover the financial needs of Europeans that offer financial stability. This is very important. My impression is that this is the reality of Brexit, which was not desired by the EU as a whole. As we go forward, this needs to be the priority. Fortunately, in financial services, this priority is combined with another priority that has always been very important for the European Union and for the UK, and still remains so. This is to have integrated global financial services and very active collaboration at the global level to make sure that there are global financial flows and global financial capital mobility, and things of that sort. The Basel agreements, the Financial Stability Board, the G20 decisions and all this infrastructure must ensure that. Those are the principles we want to ensure that we have global open markets as far as possible, but we also want to show that we have a European Union with financial markets that are able to provide services to the local economy and ensure financial stability. Those are the two goals. 

You just celebrated your 10th anniversary. So 10 years of the EBA and all of the ESAs. My personal perception because I was around and I was working when Jacques de Larosière published his report. So I followed it from the beginning and my perception is that the role of the EBA was really quite prominent in the beginning. Then since the SSM and the SRM have come into being, I think the EBA's role has shifted a little bit for me, more into the background - but now I see, especially in the last couple of years that the EBA along with your sister organisations, ESMA and EIOPA, is sort of asserting a little bit more. With more opinions, with more guidance. Would you agree with that assessment or how do you see the role of the EBA now? In addition, do you think it has changed and matured over the last 10 years? 

I think that the EBA and the ESAs as a whole have matured over the last 10 years. Certain things that 10 years ago were perceived to be very difficult to accomplish, we now take for granted, such as the stress tests. There were huge debates about when the stress tests should take place, when they should be published, when they should not be published, or whether there should be a standard methodology. All that is taken for granted now. We are going to publish individual results on all the sample banks across the EU, with a common methodology. Therefore, in that sense, there has been a very large amount of progress. Unquestionably, the creation of the Banking Union was a great leap forward in the mission of the EBA. The EBA had a mission to foster the Single Market and coordinated supervision for banks and we were lucky enough that the decision-making moved in such a way to enable us to create a single supervisory body for almost all of the European Union. So in that area, our mandate has been executed much faster, which has been incredibly good. However, we also have different roles. We have the mandate on convergence supervision and we have the regulatory mandate. On the regulatory mandate we continue to have a strong say and maybe we are more assertive, because now we need to speak to a larger sister entity, the SSM, and that is good. Progress has also been good. I think that for the industry, the banking sector, the underlying history has changed and priorities have shifted – ESG, technology, digitalisation - those are large challenges facing our societies going forward and facing the finance sector. We need to be ready to deal with those challenges. It is no longer so much about fixing the problems from the previous financial crisis. In fact, our experience over the last year, through Covid, has shown that the banking sector and the financial sector were better prepared to manage this crisis and have been able to be part of the solution not part of the problem, and that has been good. The challenges remain, they are just different. In addition, as I said, ESG, digitalisation, conduct and similar issues related to cyber security, and financial crime in the context of technology are very important to us moving forward. 

The interview was conducted by Sarah Collins.

The Irish Independent, 1 April 2021