Ángel Monzón interview with El País : ‘Banks now have more capital than we have ever seen before’

  • Interview
  • 29 JULY 2023

The EBA senior manager calls for caution in the macroeconomic scenario due to a possible rise in defaults. 

The stress tests on European banks are a turning point for ascertaining the solvency of institutions in the event of a crisis and anticipating possible risks. The EBA head of stress testing, Ángel Monzón, explained the position of European banks and the new risks in the current scenario to El País and Cinco Días.


Question: Are European banks prepared to withstand a crisis?

Answer: The stress tests show us is that banks are solvent and resilient. They stand up well to a scenario that is very adverse because it is based on a global recession, with rising interest rates, persistently high inflation and falling property prices. Our conclusion is that banks are continuing to withstand well in the worst‑case scenario, even if there are differences between banks. However, it should be noted that these are uncertain times and we always say that we have to be careful because the macroeconomic situation is unpredictable.

Question: The most severe adverse scenario ever undertaken has been designed. Are banks at their best level of solvency since the tests were introduced?

Answer: Yes, definitely. The banks had a very strong starting position as they already had a capital ratio of 15%. Compared to the global financial crisis in 2007, for example, the ratios were around 8%. Capital has really gone up, which provides a very good starting point for the tests. It is also important to note that banks have made significant efforts to improve the credit quality of their portfolios, and the fact that they are now generating healthy profits means that an adverse scenario should have less impact. On the one hand, it is a very severe scenario, so banks are affected. On the other hand, the initial situation of good results, increased interest margin and high credit quality allows them to generate a buffer and limit losses.

Question: Is there any difference in the results of banks of different sizes and with different geographic diversification?

Answer: What we have seen is that the banks that have the most profits usually perform best in this stress test. Geographic diversification can help banks, but it also depends on their exposure to different countries and the scenario. It is true that some of the more diversified banks, such as some Spanish banks, have higher revenue generation, but this also means a higher credit risk.

Question: The macroeconomic environment compared to previous stress tests has taken a 180-degree turn. In 2021 the rates were at zero and now they are growing rapidly. How have banks’ risks changed?

Answer: 2021 was a time of low rates and now the scenario is based on higher rates and high inflation. On the one hand, this is positive because banks generally benefit from interest rate increases. But on the other hand, higher interest rates also affect credit risk. In addition, there is a certain repricing in deposits and we have asked the banks to increase the interest rate they pay when calculating the scenarios, which reduces revenues.

Question: Beyond the good results, have you detected any weaknesses in the banks?

Answer: Some banks perform worse than others, and sometimes it is a combination of factors. Sometimes the weaknesses are due to the fact that banks have very high costs. This penalises them because a high cost structure means that when revenues are reduced they have to continue paying the costs. There are also issues relating to the balance sheet of assets and liabilities. If the loan portfolio is fixed rate, it is penalised more in income than a floating rate portfolio, as the scenario is based on rising interest rates.

Question: Which risks are of most concern to the supervisor?

Answer: Banks are in a very good position compared to the past. There have been many regulatory and bank efforts to improve the situation, which means that we have more capital than we have ever seen before. Banks have also made considerable efforts to reduce their bad loans. But we need to be cautious and bear in mind that interest rate increases may have a risk on credit portfolios because customers have to pay more for debts. For now, the credit risk is still very low, but we are in an uncertain environment and there may be losses in the portfolios in the future.

Question: Could good test results lead banks to increase dividends and share buybacks?

Answer: It is true that after a period of stagnation, banks have returned to paying dividends. Stress tests provide supervisors with information that, in addition to other information, helps to assess the situation of each bank. But this is a more specific issue that the supervisor will have to discuss with the banks individually.

Question: Stress tests have received some criticism recently. Why are these tests important?

Answer: Stress tests were introduced to provide transparency after the 2008 financial crisis. They have helped to provide public information to understand hypothetical bank losses in an adverse scenario. But they also provide a lot of information to banks and supervisors themselves. They have helped to improve risk management, which has put banks in a better position today than they were at the beginning.

The Interview was conducted by Ricardo Sobrino

El Pais/Cinco Dias (Madrid)