José Manuel Campa: ‘Banking adjustment is set to continue, COVID has just speeded it up’
The European Banking Authority (EBA) Chairperson regrets the lack of progress in the banking union and warns that future tests on banks will include green factors such as sustainability and cyber risk
José Manuel Campa, Chairperson of the European Banking Authority (EBA) is interviewed by video by La Razón from his Paris office at EBA headquarters. The EBA is scheduled to publish its stress tests on 30 July. Having been postponed in 2020 due to the coronavirus, the tests analyse the solvency of 38 banks that account for around 70% of assets in the euro area, among which four Spanish banks figure (BBVA, Sabadell, Santander and Bankinter).
We are in the middle of the fifth coronavirus wave with the Delta variant on the rise and a lot of uncertainty as regards the economic recovery. How is this affecting bank solvency?
From the outset of the crisis we warned it was going to negatively affect banks' balance sheets and we advised prudence, which explains the measures that were taken last year. To date, these warnings have not come to fruition. Banking liquidity and capital ratios have improved in 2021, while those for defaults have dropped. It's a bit of a paradox, but we still expect that when the crisis passes, and even after the economy has recovered and all restrictive measures have been lifted, credit quality will worsen because some sectors have been heavily affected and this will see a rise of defaults in banks. We are recommending that banks pay close attention to credit quality developments in their counterparts. Early indications would suggest that defaults are going to rise. However, our analysis assures us that the system has sufficient quality and liquidity and that we are in a position to bear the impacts of coronavirus owing to the measures implemented by governments to support the most affected sectors.
Over the last few months we have seen proposed mergers and mass staff adjustments and lay-offs. Is this trend set to continue or have the adjustments come to an end?
Even before the coronavirus crisis we were warning that one of the main challenges facing the sector was to improve profitability. Given the low interest rate scenario and the far from excessive credit growth across the EU, banks needed to adjust costs and improve their spending strategies to be able to seek more stable long-term profitability and, moreover, to adapt to the technology changes and the new business model that has emerged with digitalisation. I believe this cost adjustment is widespread and that COVID has not done away with it, but has accelerated it, thus banks will continue along this path. Profitability was very low last year, mostly negative on average for the sector. This trend began back in 2014, so it has been going on for years and needs to be reversed.
Is the EBA in favour of cross-border mergers?
We are working to establish a European single market and to make this work well, so that both consumers and the operators, the banks, find it attractive to make services available throughout the 27 EU member states. That’s our goal. According to the feedback we are receiving, managers do not see cross-border transactions as profitable. So we need to keep working, not necessarily to encourage mergers, but to make it possible to offer services effectively, efficiently and competitively in several EU countries to enhance competitiveness and service quality for the public.
With fewer banks, there is a feeling that customer freedom to choose products is impaired ...
That’s right! But in this case this does not depend on market size. If I look at the effective market size, if there is consolidation in Spain or France say, this is not as important if I consider the end market share of Spanish banks in the EU as a whole, which is very small. If I manage to get EU banks competing effectively for the European single market, what I need to think of is concentration on a European not a national scale. And that concentration is still low. In fact, there are a lot of banks in Europe, a lot of competition. But concentration isn’t as important as such, rather the competitiveness resulting from that concentration. Whether concentration translates into more or less competitiveness. If we manage to get better operators, competitiveness will improve and that will be better for consumers too.
With bigger banks also comes the danger of a return of the too-big-to-fail principle, which in the past led to financial institutions being bailed out with public money ...
That's true. Size is a concern, and that explains why so much regulatory progress has also been made. There are all the new regulations on bank resolution and recovery, which require financial resources to ensure that banks are resolvable. If a bank gets into difficulties, these resolution plans enable us to resolve it without systemic consequences. The regulations that have come into force over the last 7 years would lessen the systemic impact, thereby reducing the importance of the too-big-to-fail problem.
It is expected that the European Stability Mechanism (ESM) is to act as the lender of last resort in 2022. Does this mean that public money will not be used again, or at least less of it?
The latter, definitely. A lot of resources have been made available for bank resolution. These are private resources, such as the resolution fund (provided by the financial institutions), not to mention the capacity of the ESM to act as a backstop. To these must be added the resources made available by banks through more capital and the financing of loss absorption. All of this means there will be less need to resort to public funds if a bank gets into difficulties. In the last analysis, the ESM is a public resource. The regulations provide for resort to the ESM, but the amounts involved would be clearly lower than those used in the past.
Earlier you mentioned financial institutions not viewing cross-border mergers as profitable. Are you also concerned about the lack of progress towards banking union?
This is an important issue that we need to keep working on. Since 2012, when the banking union decision was made, a lot has been done to achieve a single resolution market and a single supervisory authority. However, the degree of effective bank integration providing cross-border services has failed to grow, and we need to reflect on this. One of the reasons is not having completed the banking union, particularly unifying the deposit guarantee system and the creation of a pan-European system or a single guarantee scheme. In the last analysis, banks are reluctant to move money from one country to another because, if the bank is wound up, liability for customer deposits falls on a national deposit fund guarantee scheme.
Can you see any solution? This question seems to be at a standstill ...
It’s difficult to know. There was a commitment to having a plan by June. At present, the aim is that the president of the Eurogroup will try for December. We hope progress can be made.
What do you think about the change in the ECB inflation target to 2%?
As a rule we refrain from commenting on monetary policy. It doesn’t fall within our remit. But the specific impact on banks is relatively small. Essentially, we are facing a low interest rate future. Indeed, we are about to publish our stress tests’ results on 30 June and the worst case scenario foresees lower interest rates for longer than expected, thus the banks will have to take this on board. Let’s see how they react. Nonetheless, obviously this low interest scenario is not good for their financial margin, which is getting tighter.
Even though the decision to review the 2% target was taken unanimously by the ECB Governing Council, divisions have surfaced in the last few days as to how this is to be applied. Could these possible discrepancies in the ECB cause uncertainty in the sector?
The scenario is that interest rates will be low. When we talk to the banks we tell them they must take monetary policy as an item of information, as something beyond their control. Cost management and how they offer their products to customers is something they can control.
Indeed, in low interest rate scenarios a lot of traditional savers become investors. The case of the preference shares is still very much on people’s minds in Spain. Are you concerned a similar situation may recur?
Generally speaking, yes. We are concerned that depositors may perceive themselves as investors and that lenders, because rates are low, are generating income elsewhere: by charges, by providing other services. This is a constant concern. And it is a message we have conveyed during COVID: banks must keep customers’ best interests in mind when offering financial services. These services must be coherent and in line with the customer risk profile. Customers must be familiar with the product and banks must assess whether it is the right product for the customer and not a good one for the bank. We are putting an emphasis on consumer perception as regards the conduct of banks when it comes to preventing financial crime.
The EU has proposed a new European authority to combat money laundering. What will the EBA's role be?
Since January last year, we have become the EU-wide authority responsible for regulating money laundering in the financial sector. The current directive is a minimum one, based on general principles, which grants great leeway to EU Member States. In the last analysis, supervision is a national responsibility. Ours is a coordinating task, but the Commission proposal, which we believe is going in the right direction, calls for more direct regulations to ensure homogeneity in dealing with money laundering in the EU and the direct supervision by this new institution of riskier entities, which is not always related to size. This list has yet to be decided on. The authority can count on our full collaboration. It will not only be responsible for financial services, but will also but be looking at potential money laundering entities in other sectors. We will continue to be responsible for having money laundering risk incorporated into all bank controls. In fact, the European Commission proposal includes us as a member of the authority’s Supervisory Board.
How do you know which are the most dangerous entities?
This is something we have been pushing for. One of the main complaints about current legislation is that it is excessively formalist. Entities are expected to complete forms about transactions that may be suspicious and pass them on to the authorities. A lot of data are transmitted but very little information. What we are saying is that the most important thing is not the number of transactions, but a prior filtering of riskier entities and customers based on criteria and then closely monitoring where you think the risk is most concentrated. The Commission is proposing the same thing. There are several criteria: what type of transactions are being conducted between parties very quickly, volumes, jurisdictions, etc.
You had to tackle the hardest aspects of the previous crisis as Secretary of State for the Economy, are there any differences between that crisis and the present one?
In terms of banking there are obvious differences. One is the origin of the crisis. This has been a health shock, external to the economy, though restrictive economic measures have been required to resolve it, which affect people’s income and bank solvency and liquidity. The previous crisis originated in the financial sector. In countries like Spain there were significant economic imbalances, such as a highly concentrated activity in the property sector. This is not the case today. There are no longer such big underlying imbalances. As an economist, I’d say that this is more of a cyclical crisis; and people will probably return to their normal lives much more quickly, whereas the previous crisis was structural. From the banking standpoint, financial institutions were in a much better position at the outbreak of this crisis. The political economy has reacted much more quickly, strongly and assertively – indeed, almost aggressively – than in the 2008-2012 period, given the crisis was very long.
But the Spanish economy continues to rely heavily on tourism and the hotel industry. The NextGenerationEU fund is not going to transform this economic model, is it?
Well, I think it will serve to transform the European economic model. I don’t believe that this crisis has managed to identify new weaknesses, but it has sped up ongoing processes: bank profitability, sustainability, etc., and that has enabled us to embark on very ambitious projects such as NextGenerationEU, which was not designed to solve the COVID problem but to address transformation structural problems, with a bit of luck, for the next decades.
Do you think Spain is capable of absorbing the funds?
Yes, I’m confident of Spain’s capacity to do so. Indeed, our country already showed this 20 years ago with the ERDF regional development funds. The message we get is that Spain's plan is solid, good and well thought out. The devil is always in the details, in the execution. But I have no reason to question its capacity.
How are banks going to contribute to combating climate change?
Banks need to have their own sustainability strategy on how they wish to tackle this challenge. Firstly, governance criteria, sustainability committees, how they are going to asses these risks in their organisations, etc. Secondly, they need to have adequate information. And we are going to ask banks for data on their exposure to certain green and non-green sectors and about their ambition, where they want to find themselves in the medium term. Thirdly, these risk assessment models need to be improved. This is all very complex, because we don’t know how this underlying risk is going to develop in a lot of sectors because regulations may change or the risk is perceived differently. Three months ago we published a first exercise on bank sensitivity to climate risk. If these three conditions are met, banks will be capable of channelling funds to attractive projects.
So there are going to be climate stress exercises every so often then ...
Yes, but different to present ones. Maybe not as solvency focused, but looking at more qualitative than quantitative aspects, because it is unlikely we will be able to be very precise. But as we progress, apart from traditional credit market risks, cyber and sustainability risks also figure on our risk map. They are the ones that have increased most, and to which we are attaching most importance.
Will European entities not lose competitiveness with respect to other countries because of this green revolution?
My worry is that if measures are not taken we will find ourselves in more drastic situations caused by climate change and sustainability related impacts. I’m quite optimistic in this regard. There is increasing global awareness about these problems. The problem lies in how to manage them. All scientific analyses tell us that the risks have not gone away, quite the contrary.
The interview was conducted by Mirentxu Arroqui.
La Razón, 25 July 2021.