Isabelle Vaillant interview with Il Sole 24 Ore: Banks: rules need simplification and a new balance

Banks: rules need simplification and a new balance

Simplifying without deregulating. And finding a new balance in the rules for European banks during a period of transition to new risks. 15 years after the Great Recession, the main objective has not changed: maintaining financial stability. In this exclusive interview with Isabelle Vaillant, the Director of Prudential Regulation and Supervisory Policies at the European Banking Authority, we cover a wide range of topics, from Basel III to securitisation, from operational risks and climate-related ones.

15 years on from the Great Recession, banking regulation is coming under criticism. Is it excessively strict and complex to the point of undermining banks’ competitiveness and lending capacity? Calls for deregulation are growing. How will the EBA respond?

We can’t forget that without the EBA, there would be 27 different sets of rules. Now we have a Single Rulebook, a unified set of rules, instead of 27 separate ones. While their scope and duration can be redefined, this is nevertheless a significant achievement. Simplification does not mean deregulation. In fact, deregulation is not up for discussion. But we have made – and continue to make – significant progress in simplifying the regulatory framework. The EBA was established 15 years ago and the SSM 10 years ago. Now we must seize this opportunity and make the most of these two pillars of financial stability. We have to bear in mind that the Great Recession cost Europe EUR 400 billion – in other words, half the amount of the investments that have just been made in European defence spending. However, we need to find a new balance. We are now in a transitional period, where the new risks must be redefined in a straightforward manner. We also need to set a new balance between the scopes of European and local regulations. I don’t mean national level, but rather local level: there is a need for greater harmonisation, but without undermining the local level.

How is banking regulation adapting to face today’s major challenges?

We live in very interesting times, which brings us promising opportunities for two reasons. Firstly, we are going through an economic and financial cycle.

We have introduced specific rules to address the risks that emerged during the Great Recession, as we needed to fix those issues. Now, a few years later, we can take a step back and reflect on whether some of these rules can be simplified. This is a regular cycle; there is nothing dramatic about a revision like this. Secondly, the world order is changing, with the US and the UK potentially altering their banking rules, which can only prompt the EU to redefine its role in securing global financial stability, and assess what is best for our system and how we can navigate these changes on our own. This is where we currently stand in the banking regulation cycle.

Global dynamics are shifting, and Europe will need to adapt to this by robust financing of defence, digitisation and climate-change initiatives in a bank-centric system. Will European banks be up to the challenge? In the fourth quarter of 2024, the loan-to-deposit ratio was the lowest since 2015, which is not a good sign. Businesses complain that credit conditions are still too restrictive and burdensome. 

I agree that Europe is at an economic turning point. But from what we have seen, there has been no major credit crunch – there is no credit crunch. Banks are resilient, they have liquidity to deploy and keep generating profits. They are able to finance whatever is needed. Banks are not the weak point. The weak point is the lack of investment. 

Moreover, there is a need for greater harmonisation of the rules. For instance, the securitisation approach has worked, and the new securitisation regulation will be simple, transparent and standardised. And we have to keep this up, applying the same approach to covered and collateralised bonds, which help banks offload risks from their balance sheet.

Can the EBA play a role in the harmonisation process? Are you ready to step in and help harmonise the rules on covered bonds, for example? 

Yes, we could help with that, but we need a proper mandate to do so. There are some key mandates that require closer attention.

The subprime crisis wiped out all securitisations, even those with solid AAA ratings. Is it difficult now to regain full confidence in securitisation?

It can be done, through standardisation, by harmonising rules and by having sound due diligence in place. The subprime crisis has left a scar, no doubt. But that wasn’t triggered by EU assets, but rather by the US. Those subprime loans were unregulated and were not standardised in any way whatsoever.

Meanwhile, geopolitical risks are on the rise, impacting credit, operational and market risks. Banks need to manage them better – but how?

Geopolitical risks have an impact on banks’ clients, on businesses and on governments. They extend to all types of risk across the full range of loan portfolios on banks’ balance sheets. Banks are being asked to diversify geopolitical risks, such as sanctions and tariffs, by analysing their loan-to-loan impact.

Climate risks are on the rise as well. And unless we reduce CO₂ emissions, we will also face increased environmental risks. On this front, can prudential regulation be reduced? 

Obviously, you can’t break the thermometer before checking the temperature. Last month, we published a report providing guidance to banks on how to shape their risk-management strategies for climate-related risks. We increased transparency and explained the metrics and data required. It is crucial for banks to assess climate risks in their portfolios; and they are increasingly doing so.

Is there a more rigorous stance on operational risks? Is the EBA’s approach more stringent?

That’s an interesting question. Operational risks have always existed, but now we are measuring them even more closely as banks have become more dependent on digital systems and IT. 

Cyber risks will be a top priority for supervisors and regulators in the next three years. We are encouraging banks to develop cyber-risk management systems and continuity plans in the event of cyberattacks. We are taking the lead on this. When we launched the consultation on cyber risks and the need for a harmonised taxonomy, we received a lot of requests from both banks and international providers, who asked us to lead a global initiative based on our expertise. Now is not the right time, though.

As regards global rules, ‘globalisation’ has not yet been fully embraced in the final stage of Basel III, with the United States holding back. Will Europe face further delays in the implementation of the new regulations for the trading portfolio?

We left some of the Basel III legislation unfinished on purpose as we were unsure, even during the drafting phase, about what the UK and the US might do. With regard to the trading portfolio, and thus market transactions and related fees, it should be noted that the margins of this business and its immediate costs are more sensitive to the introduction of new rules than any other part of the banking portfolio. We have done our part at the EBA: banks are aware of the new trading rules. The Commission has decided to launch a discussion on a few options: further postponement, or certain new amendments to specific provisions. Applying the Basel III rules on trading portfolios in their current form would increase the costs for European banks, thus affecting their margins. If European banks passed these higher costs on to clients, US banks could gain a competitive advantage. But the fact remains that the aim of Basel III aims to make banks more secure.

However, the trading portfolio of European banks is very small, typically accounting for just 10% of the overall portfolio, with only a few institutions reaching up to 20%. The remaining 80% or more is made up of traditional loans. In contrast, the situation is reversed in the US. If the plan for the capital markets union goes ahead, we will rebalance this gap.

The number of non-performing loans (NPLs) has fallen dramatically since the Great Recession. Why are you still worried that they might rise again?

While ratio of NPLs to total assets remains very low, there are indications that this level may be fragile. The number of impaired loans is rising rapidly, creating a vicious cycle that is hard to break once it starts escalating. So it is crucial to detect any warning signs early, and that’s what we are doing right now. The stress tests that we will conduct this summer are an excellent tool for measuring just that, as well as assessing the risk of NPLs increasing once again.

‘Volatility is increasing, and now is not the right time to loosen the regulatory standards in the area of bank resolution. We can improve transparency and make the rules simpler, but we cannot abandon resolution plans. Our authority, our intervention tools such as the EUR 80 billion Single Resolution Fund, the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) in the event of a crisis – these are all must-haves. Thanks to them, we can increase market confidence in financial stability and banks’ crisis management without needing taxpayers’ money,’ said Dominique Laboureix, Chair of the Single Resolution Board, at a press conference in Brussels yesterday.

Laboureix welcomed the SRM’s (Single Resolution Mechanism) progress achieved so far. Between the end of 2025 and the beginning of 2026, all European banks will have met the required MREL, and this year they will not need to make any further payments to the Single Resolution Fund (SRF), which has maintained its full firepower of EUR 80 billion (1% of covered deposits, as required by law) since 2023. ‘With these two instruments – the SRF and MREL – we can take care of the vast majority of banks,’ assured Laboureix, hoping, however, that the European Stability Mechanism (ESM) would be allowed to contribute to the management of banking crises with its immediate EUR 60 billion liquidity injection (the ESM would provide a loan if needed, which would in any case be repaid by the banks without the bill for the banking crisis being passed on to the taxpayers).

In an interview with Il Sole 24 Ore, Laboureix explained that the approval of bank acquisitions, including cross-border deals, is the sole responsibility of the ECB/SSM from a prudential point of view. But once the green light is given and the initial public offering (IPO) moves ahead, the acquiring bank must open a dialogue with the Single Resolution Board and immediately start working on the new MREL and the resolution plan for the new banking group.

As regards the launch of on-site inspections by the Single Resolution Mechanism, Laboureix clarified that these control missions, aimed at assessing the reliability of banks’ resolution plans, started at the end of 2024 and will continue (three have already been initiated, of which one is ongoing). He stressed that these inspections are not aimed at struggling banks, but rather serve as random preventive checks. Sooner or later, the resolution authority’s inspectors will pay a visit to every bank to verify – in a mission that takes a few days – the effectiveness of its resolution plans. ‘The more the banks are prepared to address a crisis, the less they are exposed to the risk of an actual crisis occurring,’ Laboureix noted.

The interview was conducted by Isabella Bufacchi

Il Sole 24 Ore (Italy)