Mario Quagliariello's interview with La Repubblica - European banks have withstood the crisis and in Italy profitability has increased

European banks have withstood the crisis and in Italy profitability has increased

The EBA determines the rules, which must be complied with by all European banks. We do not have direct competence over the supervision of individual institutions, but we made clear that banks must be proactive in dealing with risks and be prepared for them. European banks have reacted well to the COVID crisis, and have capital buffers enabling them to navigate through difficult times. We need to pay close attention to their risks.

The regulatory reforms we have launched in recent years to address the most severe crisis, have proved to be effective, and some unpopular choices very wise.

Was the macro-test of a “true” recession, worse than any scenario envisaged in the past, not enough?

Our exercise is more useful than ever. Of course, we consider what happened in 2020, but we are projecting banks’ activity over the next three years. The starting point, i.e. banks’ conditions at the end of last year, is quite solid. And this is thanks to our systematic requests to institutions to disclose their capital levels and risk management criteria. Also on the NPL front, the system has shown resistance. Of course, the historical low level that was reached last year (2.8 % of total loans in Europe) will rise again and could double. However, the picture is not dramatic, even for Italy. On the contrary, some parameters are better than the EU averages, such as profitability, which was 2.5 % in Europe and 3.8 % in Italy. At a time when making a profit with zero rates is difficult. In the case of CET1 ratio, the highest quality of capital, the difference is also small: 15.1 in Europe and 14.2 in Italy.

What scenario did you design for the next three years?

We want to see how banks would react to a further loss of European GDP of 3.6 % accumulated in 2021, 2022 and 2023. The baseline scenario referred to is the ECB forecast: + 10.4 over the three-year period (+ 3.9 in 2021, compared to -1.5 %, + 4.2 next year compared to -1.9, and finally in 2023 + 2.3 according to the ECB, and -0,2 in our hypothesis). This scenario is hypothetical, negative but not catastrophic, plausible as the pandemic is not resolved yet and there are still many uncertainties about the future. We need to know what banks do it if the situation does not improve.

But how did banks behave this year?

 They have effectively fulfilled their role, which is of crucial importance during the pandemic, to provide public support to the economy. The fact that they were not at the origin of the crisis, and had maintained a sound financial structure, made it possible to maintain the credit lines already granted, provide flexibility to customers in distress, and allow them to take advantage of public guarantees. All this in synergy with governments and the ECB, which has, meanwhile, broadened monetary measures. Our interventions avoided the automatic downward reclassification of customers who had benefited from the moratorium, but we continued to ask banks to conduct a careful assessment of credit risk on a case-by-case basis. For ten years, we have been calling on banks to strengthen their capital positions precisely to anticipate events such as those that have occurred and we have achieved some good results here.

And now? What should we expect from 2021 that we all want to mark the end of the pandemic?

Banks are part of the economic system of a country. The stress test is a diagnostic tool to understand the forward-looking robustness of the banking sector, including the protection against cyber-attacks, and its ability to continue to support households and businesses ensuring full support of customers in distress.

Prudent risk management and adequate levels of provisioning are a precondition for banks to continue to fulfil this role. The regulatory reforms we have implemented as a result of the great financial crisis are proving to be effective. We do not only rely on strictly financial parameters. In our ‘narrative’ we considered the changes in habits that will be structural. Take smart working: many offices and even industrial plants could be used less, so we have included -31 % in the value of commercial real estate (again it is an assumption to see how banks would react), double by -16 % for residential buildings. The consequences for the banking sector would be substantial, ranging from unpaid loans to reduced value of industrial properties given as collateral for loans. The stress test is an exercise of pessimism but also realism.

The interview was conducted by Eugenio Occorsio.

 La Repubblica, 15th of March 2021