22 % of claims under moratoria is not unreasonable
The end of moratoria in Portugal is approaching. But this is not a matter of concern for the European Banking Authority (EBA), which states that the amount of claims under this scheme “is not necessarily of undue concern” compared to other countries, and that it will decrease in the coming months. For Piers Haben, Director of the EBA, Banking Markets, Innovation and Consumers; it is important that banks start identifying potential problems now, and presenting solutions to customers at risk.
Are Portuguese banks prepared for the completion of moratoria?
Portuguese banks, in comparison with their position in 2014, are much stronger. They have entered the crisis a lot more capitalised, with less NPE and with more experience in the management of NPEs. Moreover, there is already a secondary market for NPEs in Portugal. This means, and I believe, that they are in a situation much better than before and they are better prepared to deal with the end of moratoria. We’re in a better situation because of the experience we have gained with the previous crisis in dealing with NPE. We have all the infrastructure put in place, a good secondary market, as well as work out units in banks and effective strategies.
Banks have already admitted a prolongation of moratoria. How do you see this scenario?
What matters is that there was room for manoeuvre where it was necessary, but as soon as we move to the new normal then we need to start ensuring an effective relationship between banks and customers. This is the key point. Whether the moratorium ends at the end of March or later, what is important is that we quickly create such a relationship. If the banks have the information that there are problems with the ability of a customer to pay — the ‘unlikely to pay’ criterion — it is important that such a relationship exists. We have told banks to ensure this monitoring, make sure they are talking constructively to customers. So I wouldn't get too hung up on a particular date. What's important is that we have a tapering out of the moratoria and we move quickly to constructive engagement.
EBA considers to prolong the framework in a manner that the claims are not considered to be loss-making?
Our framework now ends at the end of March. I have no information from that the framework will be prolonged.
If you are providing a loan outside of the EBA's moratoria guidelines, you can still do it. There is nothing illegal about it. It's perfectly fine. The difference is that Bank has to analyse and identify which type of reclassification is required without the EBA framework. If you are in a national moratorium outside the EBA framework, you do not automatically move to “non-performing”. But under the national moratorium it is a risk for banks and it is for banks to make the appropriate analysis.
Banks agree with an extension of the measure, but only for some sectors. Do you?
We have an incredible framework that provided support across the EU. We will have to see the decisions of the Council of supervisors in the future. At the moment, that decision is that the framework that we agreed at an EU level ends in March. There is no reason why local and individual banks can't continue to offer the same terms to new customers, but they would just have to do this assessment of classification. I do not agree or disagree. The framework ends at the end of March. We spoke about 22% of loans in Portugal being under moratoria. Obviously, in the next six months, that's going to be a much lower percentage and it's going to be much easier for banks to deal with individual customers, so that huge amount of loans that had to be looked at through the lens of moratoria in 2020 is now going to be a much smaller amount.
Depends on which countries if you are comparing. But yes, it is not fully fired compared to other countries. Of course, in the next six months this percentage will be lower and much easier for banks to deal with individual customers.
This huge amount of loans in moratorium in 2020 it will be very much smaller. The 22 % of claims in moratorium is not a problem?
The problem will be to ensure that we understand which customers have difficulties. Moratoria have been designed to help the people and
we cannot say that moratoria are a problem.
What matters is that we have effective monitoring and an effective relationship [between customers and banks]. Stress tests will help to understand [where are the problems].
Do you think Portuguese banks will be capable of doing that?
I think that Portuguese banks have managed to reduce the NPE Ratio. In 2014, they had something like a ratio of 18 %. When we entered the crisis, they had close to 6 % [second quarter of 2020]. I think there is capacity to work constructively on quality assets. Now that we have collectively built up capital - there is a capital in the system. We are not complacent because of the work we have done before. We have a lot of work to do. We are in a good position, however, we cannot be complacent. We have a challenge in terms of profitability. The ROE [return on equity] for Portuguese banks was 5.9 % before. In 2020, it was 1 %, which is well below investor expectations. Portugal is not the only one. I think that, as we emerge from this crisis and looking at the future risks of the banking system, asset quality will be a [risk], but profitability will be another.
Piers Haben, Director of the European Banking Authority (EBA) for the banking sector, innovation and consumers, anticipates an increase in credit bad in Portugal with end of moratoria. No you advance figures, but expect you not to return to levels recorded in the previous crisis. “That would be terrible”, says EBA’s business interview officer.
The end of moratoria is leading to an increase in non-performing loans. What will this increase be?
We can expect an increase. Any increase is significant because it affects the European citizens.
Can we return to the levels of the previous crisis in Portugal?
I would not comment specifically if we return to previous levels. When moratoria end, some customers will identify difficulties in paying the loans. We will wait to see the level of ‘Non-performing exposure’ (including non-performing loans) and is important that we recognise these problems. I prefer that these problems are recognised and we understand what this means for balance sheets of the banks. But what I think is that regardless of then what happens, what matters is that we do not have the situation of 2011 when we had a long period of time without dealing with NPEs. What is important is that there is an early interaction between banks and customers to deal with this. I think we are much better now than in past because of banks’ experience in relationship with customers and by cause of improvement in the market secondary.
Banks are prepared for an increase in non-performing loans?
Banks are better positioned, customers are better positioned.
Personally, I sincerely hope that we will not return at the levels we have seen before because this is people’s lives. This would be terrible.
But what is important is that we have the structure to support people, customers, as they go beyond this difficult time.
It makes sense to create a bad European Bank”?
There is my personal view and there is the EBA’s perspective. There is a problem when banks want to sell, when buyers want to buy and there may be a gap in pricing due to information asymetry. One solution is to have an AMC [Asset Management Company, or Management Company for European] assets. I think it is still possible. There are good arguments for an AMC, but what we did — there was no political appetite to do so — it has been to find others how to solve the gap of price. My team has worked in uniform data templates, and we are trying to improve these templates because if we have a common set of data then investors more easily find information that they need. Personally, I see value in a European AMC, but I also see the challenges it involves logistically and politically. For this reason, what we are doing, instead of it is to create the infrastructure around transparency of data, flow of information, which effectively should address the same problems: The problems of Timing and information in Single Market. So I think we can resolve the issue with other means.
Stress test will dictate regulatory flexibility
The European Banking Authority (EBA) has adopted a regulatory flexibility since the onset of the pandemic crisis, both with the creation of the framework for moratoria on credit, without weighing on banks, at the level of capital ratios. The aim is to ensure that the financial sector remains able to lend to the economy. But this margin will have to come to an end. According to Piers Haben, Director of the European Banking Authority (EBA), the stress tests can help define when it will end.
“Flexibility with the use of Buffers of moratoria was imperative ", says the Director of the Banking Markets, Innovation and Consumers of the EBA. Flexibility that has been applied in compliance with some own funds requirements (P2G), allowing for financial institutions to use this margin to support the economy. The Pillar 2 conditions for capital covers underestimated risks.
“The framework is designed in such a way that there are many choices for different authorities ", says Piers Haben, when asked until when European authorities will keep this room for manoeuvre. “It is a decision between the supervisor and the bank” and the “stress tests are a crucial tool to assist in this discussion between the supervisor and the bank”.
According to the Director of the EBA, “I do not think there is necessarily one date” for the end of flexibility, what is important is: this future analysis and if there is a strategy defined between the bank and the supervisor on how they will create these cushions again.
Stress tests will be a guide for future problems.
The performance of stress tests was scheduled for 2020, but the EBA eventually decided to postpone this evaluation for this year due to the impact of the COVID-19 pandemic. The body will now assess 38 significant banks of the Euro area. “Clarifying the impact of shocks adverse to bank resilience under challenging macroeconomic conditions ", he noted.
“Stress tests will be important for understanding how much capital banks have, and in this way, define a plan for capital, but also profitability and NPE exposure’’, which includes non-performing loans]. ‘’The stress test is vital to return the full functioning of the banking system ",
says Haben, noting that “this is not an issue of passing or failing the test. The stress test is a way to understand from banks what capacity they have and what they can have to change to continue lend to the real economy”. ‘’Instead of a date in use of P2G, what is important is to have tools for the discussion ", ‘’I do not want to mention specific banks that might experience more difficulties in test’’.
“The interesting point for banks, supervisors and public will see these data and understand what banks are to be done in relation to potential problems”. Both Caixa Geral de Depósitos (CGD) and BCP will participate in this evaluation, the results of which will be disseminated by the end of the year in July. The bank headed by Miguel Maya was not included in the EBA’s original list, but was added together with two other banks — the Spanish Bankinter and the Italian Mediabanca — due to the exclusion of other entities due to merger reasons. When asked whether the two Portuguese banks are prepared for this test, the EBA Director says only that there is “an improvement” in the capital position and asset quality of both financial institutions. These stress tests will be taken into account, in view of the pandemic crisis. It is assumed that in 2023, at an EU level, real GDP would decrease by 3.6 % and cumulatively the unemployment rate would increase by 4,7 percentage points and prices of the buildings would fall by 16.1 %. Commercial real estate prices would fall by 31.2 %.
Portugal took over the presidency of the Council of the European Union (EU) in a period of high pressure due to the COVID-19 pandemic. Nevertheless, Piers Haben, Director of the European Banking Authority (EBA), believes that this crisis only it has given more strength to the plan. “I see the Portuguese presidency at a very important time for the EU. And, in various ways, the pandemic crisis will give rise to: extra impetus for some of the priorities of the Portuguese Presidency ", says Piers Haben, rejecting the possibility that the pandemic crisis diverts the attention to the priorities already defined, including financial ones. “The pandemic was terrible and had a significant impact, but I do not see that it diverts attention from the priorities set out in the agenda of the Portuguese Presidency ", says. The Portuguese Presidency the EU Council took over in January will last until June, with the motto “Time to Act: For a fair, green and digital recovery”. Between priorities in the plan presented by Portugal are the economic recovery, ensuring the green and digital transition. “When I read the priorities of the Portuguese presidency, I have a strong focus on digitalisation and “green” recovery, as it is imperative for the recovery from the pandemic crisis”. says the Director of the EBA, noting that “now we have an opportunity to take a step moving forward very quickly” at the level of the technological revolution. There is also another priority: Deepening the Economic and Monetary Union “Within this scope, they include: the initiatives of the banking union, including the creation of a European Guarantee Scheme ", as it can be read in the Portuguese plan. “I see all the reasons why we need the next steps to strengthen the banking union ", says Piers Haben, not expecting that the banking union will be completed by this presidency. ‘I think that the conclusion of the banking union is a long-term pathway", says the Director of the European Banking Authority, noting that “We will continue to take constructive steps in the banking union. We have already done so and I think there is more to do. This is not about concluding within the presidency. It is on maintaining the momentum of the journey. I think what matters is that we are on the right path to a true banking union”.
The European Banking Authority (EBA) was 10 years old in January. One decade during which it devoted itself to building resilience banking. Now, and in the face of a pandemic crisis, the priorities are: ensuring that banks support the economy in its recovery, digitalisation and sustainability.
“I'm very proud of what we've done in the EBA to support the European Union generally and to support the approach to banking and financial services and the Single market specifically. We have significantly increased banks’ capital. We have improved liquidity and we have worked together to improve the quality of assets ", says Piers Haben, EBA Director for Banking, Innovation and Consumers. Already in the face of the effects of Covid-19, "We had to change much of our focus to make sure we had flexibility during the pandemic”. This happened through the creation, for example, of moratoria, which gave households and businesses more time to: pay their debts with banking. “We also ensured that the framework which we created with capital buffers was able to absorb any shocks and we also asked the banks to suspend dividends to have additional buffers. We have created room for manoeuvre ", he says. The focus is now on the exit from the crisis. We must guarantee, says Piers Haben, that “banks have the capacity to continue lending to real economy and support recovery. This will be a priority after the pandemic”. In addition, the EBA will also maintain other priorities, such as digitalisation — a process that eventually accelerated with the pandemic — including Fintech. This is at a time where many traditional banks require the same regulation for these financial entities. “The digital agenda is very important for us”, says the EBA Director, noting that “What we need is a matrix that combines entity-based supervision and activity-based supervision to make sure we carry out the right rules for each activity”. In addition to the rules around money laundering — “Confidence in the financial sector is imperative”, says Piers Haben, sustainability and the social impact on businesses are other priorities of the EBA for the future.
The interview was conducted by Rita Atalaia.
Jornal de Negócios, 16 March 2021