François-Louis Michaud's interview with Børsen: The Executive Director of Europe’s banking supervision sleeps soundly at night – but is ready to intervene
Less than a month ago, two large US banks collapsed quite unexpectedly, and the second largest bank in Switzerland was forcibly sold to its rival. What does this mean for Europe’s banks?
On 10 March, the US bank Silicon Valley Bank (SVB) was unexpectedly closed down by the authorities, and a couple of days later another US bank, Signature Bank, was also closed down. One week later, the Swiss authorities brokered a forced sale of Credit Suisse, one of the world’s 30 most important banks, to its rival, UBS.
These bank failures have cost investors a total of approximately DKK 350 billion. But what really happened, and what does the turmoil mean for European banks?
Danish newspaper ‘Børsen’ has spoken to François-Louis Michaud about this. As the Executive Director of the European Banking Authority (EBA), he has overall responsibility for ensuring the stability of the European banking sector, including in Denmark.
With your many years of experience of banking supervision, how do you view the bank failures we have seen in the USA with Silicon Valley Bank and Signature Bank and in Europe with Credit Suisse?
‘It has been a classic banking crisis, but of a type that we did not expect to see happen again. But we saw a bank that ran into challenges in managing its liabilities and assets. And when there was a rather sudden change in the macro picture, it got into difficulties on both sides of its balance sheet. This was something that actually built up over a few months,’ explains François-Louis Michaud, sitting in his office on the 25th floor of Tour Europlaza with views over the La Défence business district of Paris.
Why did it happen so quickly and so unexpectedly?
‘It was perhaps the first example of a digital bank run. For Silicon Valley Bank, this was clearly triggered by a highly concentrated deposit base, which is typical in bank runs.
But the problem was exacerbated by technology, because it is so easy nowadays for bank customers to move their money digitally,’ says François-Louis Michaud, sharing his assessment.
‘I also think it is fair to ask the question: what happened to the supervision of the banks?’
What happened to supervision?
The EBA was created after the global financial crisis to ensure a more stable banking system in Europe. The Authority does not directly supervise any banks but is tasked with establishing common rules for banking supervision and ensuring that national authorities conduct consistent banking supervision.
You represent an authority that establishes bank regulation in close cooperation with supervision. How do you view the supervision of the banks that have now gone under?
‘We need to ask ourselves why the banks were not much more active in managing their risks. And I also think it is fair to ask the question: what happened with the supervision of the banks? We are very much looking forward to the report that the Federal Reserve is currently preparing on the US banks and what they will say about the possible need to look again at their rules and supervision,’ François-Louis Michaud tells Børsen.
Following the collapse of Silicon Valley Bank, we saw sharp falls in the share prices of European banks and the sale of Credit Suisse by the authorities to UBS. Why did this happen?
‘It is natural for the markets to start looking at other banks to try to identify whether there are others in the danger zone, with the obvious risk that this can become a self-fulfilling prophecy. If you look at Credit Suisse, in reality the bank was not in a situation any different to its situation several months before that, for example. But when the confidence wanes, it’s impossible to function and survive as a bank.’
Banks remain strong
One of your tasks is to supervise European banks. How do you view the banks’ situation right now?
‘I think our banks are in a good position. There will always be risks, since it is the job of banks to take risks, but with strong supervision and transparency about what is happening in the banks, we feel safe. In particular, I would like to emphasise that we have a lot of transparency as regards the banks in Europe, and I am convinced that this is something which will also help to promote market discipline in the future, meaning that panic can be avoided.’
So there are no problems at all?
‘The recent events have shown that there may not have been enough market discipline beforehand, especially in relation to the US banks, where despite information on their weaknesses being available it was not focused on. So we will, of course, take a closer look at what happened and whether anything can be done to avoid a repeat of this happening in the future.’
Risks have been eliminated
What makes you think that European banks are safe and that there is no need for bank customers or investors to be nervous?
‘There are now a number of strengths, because a lot of work has been done over the past 15 years to make banks in the EU simpler and less risky. Looking at the figures, European banks have very strong capital and liquidity positions,’ says Mr Michaud and he continues:
‘But, of course, one must always be ready to deal with changes in the environment and to understand what market changes could mean. So we ask questions of the national supervisory authorities, and this is an ongoing process. But we note with satisfaction that the banks in Europe have handled both the impact of the coronavirus pandemic and the war in Ukraine without major problems.’
How would you characterise the environment that banks in Europe are facing at the moment?
‘Right now, we have been through a series of external shocks: the pandemic, Ukraine, inflation, energy prices, and we have seen soaring interest rates. But we can still see a banking system with many strengths. For our part, at the EBA we have published an EU-wide transparency exercise, and we are currently conducting a stress test of the banks that we will publish in the summer.”
No massive losses
So are you saying that there is no rational reason why investors have been concerned about European banks over recent weeks?
‘I think it is important that the markets differentiate. It is okay to be more cautious, but the reality is that banks in the EU are generally strong. Some may be in less good shape than others, and there are likely to be some hitherto unknown interconnections in the system. But the crucial thing is to avoid panic and to underline that there are no massive hidden losses in the European banks and that their capital positions have never been as strong as they are today.’
But how do you then explain that a bank like Silicon Valley Bank could go under so quickly and so spectacularly?
‘There was clearly a liquidity problem, but at the same time there were also some very large losses due to large positions in long-term bonds, which fell sharply in price as interest rates rose,’ says François-Louis Michaud, who continues:
‘I think it shows a failed approach by the bank to managing its assets and liabilities.’
Difference from the financial crisis
But was it not exactly the same thing that happened during the global financial crisis?
‘No. The banks are at much less risk than they were 15 years ago. We have living wills that say what needs to happen with banks that run into problems, and we have simpler banks and fewer exotic financial instruments. We may have seen some unexpected dynamics, but the banks have much higher capital and liquidity buffers and far more intensive supervision, so I can say with certainty that we are in a very different position today.’
So there is nothing you would change in relation to the current rules and supervision of banks in Europe?
‘There will always be new potential risks for banks. So regulation and supervision must always look at what is evolving, be observant and work out whether it is something that might create problems for the banks’ business models,’ says the EBA’s François-Louis Michaud, and then he continues:
‘And, given recent events, we may need to look at specific areas, such as assumptions made in relation to the speed at which deposits can disappear. But I believe we are well prepared.’
‘The crucial thing is to avoid panic and to underline that there are no massive hidden losses in European banks’
Changes on the way
More specifically, what will you be looking at more closely in certain areas following the recent banking turmoil?
‘I believe we will move towards a more thorough risk assessment by the banks, and I think they will need to be more open so that problems can be dealt with by market discipline before they become serious. In general, we believe that risk management is crucial for banks and that it is important that the management of the banks ask themselves whether they are comfortable with the risk being taken.’
‘Furthermore, authorities and supervisors should continue to be tough and meet with both senior management and boards of directors, as we need more progress in terms of risk management and how the banks understand the risks they are taking. In this regard, the fit and proper rules, together with regular supervisory assessments, will create very effective incentives and will be good tools for national supervisory authorities.’
But how can we be certain that the banks will take the concerns of the supervisory authorities seriously?
‘There should be clear consequences for the banks and their management if supervisors are not happy. It is certainly very important that supervisory authorities are credible, but they already have strong powers, so they can just use the powers they have if they need to.’
The battle for deposits
New figures from both the US Federal Reserve and the European Central Bank (ECB) show that banks are currently losing deposits. Is this something that worries you?
‘Of course, it is important to differentiate between the significant migration of deposits we have seen in the United States in recent weeks and the more general effect of tighter monetary policy on liquidity. I think we will start to see increasing competition for deposits. Banks earn more money when interest rates go up, but they also have to raise deposit rates,’ says Mr Michaud and he continues:
‘There may be several reasons for declining deposits. For example, we can see that some businesses have less cash now than in recent years, and this obviously affects the banks. But I am not overly worried about the banks.’
Finally, what is your message to the public about European banks?
‘You can sleep soundly at night. There are always risks with banks, but let’s avoid simplifications. There are many differences between the banks that have collapsed and the banks in the EU. There may be some loose ends that we need to tie up to make the system even more resilient, but overall we have a strong banking sector,’ says the EBA Executive Director, François-Louis Michaud.
The interview was conducted by David Bentow