José Manuel Campa interview with Il sole 24 Ore: Stress test shows that European institutions are resilient and able to provide the economy with credit in a very adverse and difficult scenario

Stress test shows that European institutions are resilient and able to provide the economy with credit in a very adverse and difficult scenario

‘Focus on new risks, but banks are withstanding recessions of up to 6%’

‘The stress test shows that European banks are resilient and able to provide the economy with credit in a very adverse and difficult scenario, with a 6% fall in GDP and an almost 6% increase in unemployment. This is reassuring’. However, there are risks in other areas, including cybersecurity and climate, geopolitics and shadow banking, payment systems and money tokens. This is no time to rest on our laurels: European banks will need to invest more in technology and increase diversification within the EU market. José Manuel Campa, Chairperson of the European Banking Authority (EBA), is satisfied with the results of the 2025 stress test, which involved 64 European banks holding 75% of the EU’s assets. He commends Italian banks and, in this exclusive interview, looks ahead and urges banks and supervisors not to let their guard down.

‘EU banks are now in an optimal position; they are well capitalised, have a good level of provisioning and are commercially viable. They are able to generate profits, absorb losses and overcome shocks’.

Are you confident that the problems of the 2008 financial crisis will be overcome?

Banks are certainly better off now than they were during the financial crisis; they are more capitalised and more prudent. This is good news. We are now confident that banks will be able to withstand a very adverse scenario. However, supervisory authorities and banks must not let their guard down. There may be other future events to worry about. The stress test focuses on the assessment of geopolitical risks, such as a tariff war, the fragmentation of global finances and trade, and a slump in investments. Banks must pay attention to the materialisation of geopolitical risks, for example when they are asked to disinvest from a country, as happened in Russia after the war in Ukraine. There are also other areas of concern, including cybersecurity, cyberattacks and operational resilience.

Have any particular weaknesses emerged during the stress test?

Given that the tariff war and tariff shocks affect some industrial sectors more than others, as did the Russian war, we informed banks of the various impacts the adverse scenario may have in the different industrial sectors and then asked them to assess the impact in the various sectors making up their credit portfolio. Not all banks have been up to the task: some use macroeconomic models based on GDP. Banks need to be able to better assess their exposure to credit risk according to the different sectors of the economy. This is an important aspect.

The stress test is based on what was known about tariffs at the end of 2024. Is the adverse scenario over three years sufficiently severe and are banks resilient enough in the light of what has happened since?

Yes, I think that banks are sufficiently resilient. The adverse scenario remains relevant: possible but very severe. In January, we assumed an adverse scenario of US tariffs at 60% in China, 35% in North America, Mexico and Canada and 10% in Europe. They ended up being slightly higher, at 15% in Europe. On the other hand, the outlook for the European economy is now much, much better than the adverse stress test scenario. The forecasts made by the European Central Bank and the Commission in June are much more favourable than our adverse scenario, which is based on GDP shrinking by more than 6% in the European Union. Just to give an example: we assume that real estate and house prices will fall by more than 20% in our adverse scenario.

Banks must not let their guard down. Does that mean that they must not be too aggressive in their capital distribution? In the adverse scenario, 17 banks need to reduce the amounts distributed because they exceed the MDA (maximum distributable amount) and/or LR-MDA (leverage ratio) threshold for at least one of the three years in the time frame.

First, banks are now much more profitable. Banks make money and, as a result, return profits to their shareholders in the form of dividends and share buy-backs. I expect that the pay-out ratio (the percentage of profits that banks return) will continue to be around 50% this year, more or less the same as four years ago. The pay-out amount is higher because banks are now more profitable, but the ratio is more or less the same. Banks are also building up provisions for difficult periods, as Stage 2 loans are increasing. Regarding the MDA trigger, what is positive is that only a small percentage – 17 out of 64 banks – need to react to such an adverse scenario by reducing their dividends or variable payments; this shows that the system is resilient. The fact that the stress test has worked as expected in a difficult situation is also positive: the trigger is automatic and the amounts distributed are mechanically reduced in the adverse scenario.

But not all banks are the same. The impact of the adverse scenario on the CET1 ratio varies from +106 basis points to -1.263 basis points. That’s a very large range, isn’t it? What does this mean?

The 64 banks range from a small local Polish bank to branches of American investment banks. The business models are very different, from corporate and investment banking to retail banking, and they therefore react differently to the stress test. Some banks have very high capital ratios because they are more risk-oriented and their business model is volatile by nature. The banks most affected by the adverse scenario, and which have recorded the biggest losses, are also those with the largest capitalisation, which were able to absorb higher losses. That makes sense. Italian and Spanish banks with lower capital ratios, by contrast, suffered a lesser impact and recorded lower losses in the adverse scenario. The average capital ratio in 2027 in the adverse scenario was 12.1%. The starting point and vulnerabilities of each bank are important.

According to the transitional and fully applicable rules provided for in the Capital Requirements Regulation (CRR3), the CET1 ratio of Italian banks would deplete much less than the average in the adverse scenario. Are Italian banks the best in Europe?

The stress test is not a beauty contest. With regard to Italian banks, I can say that they have worked a lot in recent years to reduce bad debt. The stress testing of Italian banks is the result of a combination of two factors. Italian banks are now much more profitable than in the past and expect higher returns in the future. Their starting position in the stress test was very good. Moreover, the business model of Italian banks, like that of Spanish banks, is retail oriented: they earn more with higher interest rates and, in a context of relatively high rates and in the adverse scenario of our stress test, in which interest rates increase, Italian banks performed better than, for example, French banks.

We have a very low BTP/Bund spread compared to before. Has this had a positive impact on the stress test?

Yes. Although the spreads increase in our adverse scenario, the Italian spread has not increased as much as in previous stress tests. In relative terms, it was much lower. Government bond markets are doing well compared to previously, and this benefits Italian banks, but also Spanish, Portuguese and Greek banks. The spread and sovereign risk shock is lower. The ‘prejudice’ concerning nationality is lessening.

The stress test also shows that ‘banks that are geographically more diversified tend to have a capital depletion that is closer to the average’. What type of diversification are we talking about here?

The geographical diversification we see is outside the European Union. Spanish banks are in Latin America, French banks are in North Africa and in the United Kingdom... but within the EU itself, there is very little diversification. In this regard, we do not have a single market or a properly unified banking system. This is why we need to complete the banking union. There should also be less local and national interference.

Payments in stablecoin, money tokenisation and digital currency could unite Europe more than European banks, which are moving really slowly. Do you agree?

We are warning banks about the growth of non-bank financial institutions, a phenomenon referred to as shadow banking. This means banking services provided by non-banks, often with a high degree of financial leverage. Technology has affected some segments of the banking business – for example, the payments sector or the FX market, where banks’ revenues have been eroded. In the future, perhaps other fees could be reduced. Banks are reluctant to change, but they need to adapt to what is happening with payment systems, and deposit tokenisation will come. Bank deposits are very stable in Europe, even in times of higher interest rates. The liquidity coverage ratio of European banks is very high, at 150% compared to the 100% requirement. However, we urge banks to ‘stay alert’, be vigilant and calculate the volatility of their deposits. Our main message is that banks need to invest more in technology.

JP Morgan is going to invest $18 billion in technology this year...

JP Morgan is the biggest bank in the world... technology is a big challenge for European banks. We do see that banks in the European Union are investing more and more in technology. They must continue in this. And more.

The interview was conducted by Isablla Bufacchi

Il Sole 24 Ore (Italy)