Jacob Gyntelberg interview with Ta Nea: Banks must turn their attention to the risk of natural disasters
The Director of Economic and Risk Analysis of the European Banking Authority (EBA) discusses the challenges facing the financial sector and announces climate stress tests
‘The parameters that increase credit risk also help boost profits’, says Jacob Gyntelberg
Greek banks should prioritise asset quality control, as the level of non-performing loans (NPLs) is still high, stresses Jacob Gyntelberg, the Director of Economic and Risk Analysis of the European Banking Authority (EBA) in an interview with Το Βήμα on the occasion of the publication of the EBA EU-wide stress tests, which included Greek banks – namely Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank – for the first time.
The EBA official also recommends that Greek banks take climate change risks into consideration and quickly reprice floating-rate loans in order to boost their profits.
How will Greece regaining the investment grade impact banks?
‘We have not looked into this question specifically for Greek banks but, generally, as banks have issued bonds with guarantees or MREL bonds, these securities are examined on an individual basis with regard to their value by creditors in the markets, so the sovereign debt rating plays a smaller role in normal times. If Greek government debt receives a higher credit rating, it may have a smaller positive impact on the pricing of debt by banks than in the past.’
What risks are Greek banks facing?
‘The shock to which banks are exposed in the stress test is a combination of higher interest rates, lower growth, higher unemployment coupled with significant decreases in residential and commercial real estate prices and severe decreases in stock market indices and higher credit spreads. We take into account a wide range of parameters that affect the capital adequacy of banks. When interest rates and unemployment rise and growth declines, there is an increase in credit risk for households and companies, as they cannot repay loans. A significant part of stress test losses are due to credit risk. However, due to high interest rates and credit spreads, banks can reprice loans and record higher profits. At the same time, the parameters which increase credit risk contribute towards increasing profits’.
For the first time, the stress testing includes allocation of banks’ exposure to economic sectors. Where are the greatest risks to be found?
‘Based on the sectoral composition, there is an impact on energy-intensive manufacturing, where we see a shock, on construction as well as on food services. These are the areas facing the most serious impact.’
However, you have not covered the climate change factor.
‘We do not cover climate change risks in stress testing. This is the beginning of the effort to create the EBA’s climate change stress tests. However, we see that the transport sector is suffering, as are construction, wholesale sales and the automotive industry. Certain aspects of capital stress tests in terms of banks' exposure to different economic sectors are not dissimilar to those you would encounter in a climate change stress test. The stress tests we conduct are a 3‑year stress test with constant balance sheets, focusing on capital adequacy and capital depletion. A climate change stress test is longer term and may need to allow for adjustments to banks’ balance sheets in order to reflect changes in the real economy, such as CO2 emissions taxation. It is challenging to model it for a long-term horizon, to allow for adjustment of bank balance sheets and to reflect not only financial risks but also natural risks. We are working hard to achieve this, it is not so easy, as we need to develop new methodologies and approaches.’
What is your message to European banks?
‘The period 2008‑2009 is a period of growth in bank capital, which is also the case for Greek banks. This period is now at an end for most European banks. The increase in capital is coming to an end and this also applies to the issue of MREL bonds and guaranteed bonds; there is now a return to basic banking principles. Banks must ensure that they understand their customers, their credit risk profile, and how the economy works under higher interest rates.’
What challenges are Greek banks facing?
‘This is the first time we have Greek banks, namely Alpha Bank, Eurobank, the National Bank of Greece and Piraeus Bank, participating in the EBA stress tests, and they are an important part of our expansion from 50 to 70 banks. The capital level of Greek banks is at 14%, below the European average of close to 16%. Moreover, with respect to the impact of the scenarios on the capital adequacy of European banks, Greek banks are at the lowest level of the distribution. This is partly due to the fact that they achieved good profits to absorb the shock and are compensated for the risk they take. They still have high credit losses on stress tests but their good profits balances this out. The balance between credit losses and profits applies to all four banks. The level of non-performing loans is still high for the Greek banks, so the way forward for the Greek banks is to control the quality of the assets and ensure that it does not return to the previous high NPLs. Maintaining asset quality is of the utmost importance for Greek banks. Also, Greek banks must turn their attention – and are already working in this direction – to the risk of climate change and natural disasters. The risk of natural disasters and the effects of what seems to be a higher frequency of adverse weather conditions, affecting both Greek citizens and tourism, is a cause for concern. Furthermore, in a period when interest rates are rising, if there are more floating-rate loans, this obviously allows a bank to reprice loans quickly, pushing up profits. Understanding the interest rate cycle in terms of profits is important, given the uncertainty of the interest rate cycle. With fixed-rate loans it's a different matter entirely, but if you have floating-rate loans, this potentially means higher credit risk when interest rates rise, but also better profits, because profits can fall when interest rates fall; Greek banks need to focus on understanding the implications.’
The interview was conducted by Maria Vasileiou
Ta Nea (Greece)