José Manuel Campa interview with To Vima: Wake-up call for European banks
Wake-up call for European banks
In an interview with To Vima, the Chairperson of the European Banking Authority (EBA) forecasts a deterioration in credit quality as well as asset quality ahead.
According to Jose Manuel Campa, Chairperson of EBA, one of the challenges that Greek banks will be facing in the months to come will be to raise capital from the markets to meet the minimum requirements for own funds and eligible liabilities (MREL). In an interview with To Vima and following the publication of EBA’s Risk Assessment Report, the Spanish economist forecasts that the credit quality and asset quality of European banks will deteriorate in light of the extremely uncertain macroeconomic environment. Thus he calls on their managements to exercise prudent policies. He also makes particular mention of the worsening situation recorded in specific proactive indicators, such as the Stage 2 loan indicator which stands at an historical high. As for the issue of supporting vulnerable citizens vis-à-vis their loan repayments, there is, he points out, disquiet in many EU countries and argues that proactive engagement is the best way to confront these situations, which is precisely what he urges the banks to do.
A few days ago you published the Risk Assessment Report for European banks. What are the risks and which are the main points of vulnerability you have identified?
‘The picture in the banking sector as regards capital adequacy and liquidity is good. Capital adequacy is below that of last year’s levels, but remains high, on average over 15%. The same also applies to liquidity, which is at an average of 165%. Non-performing loans (NPL) are also low, while at the same time profitability has improved this year partly due to the increase in interest rates. Nevertheless the general macroeconomic environment is extremely uncertain and is deteriorating. Since spring, inflation has strengthened, having risen at a higher rate than expected. The war in Ukraine has introduced many aspects of uncertainty and risk, on top of which the increase in energy prices has fed inflation and affected the cost of living for European citizens, while a shrinking in savings has been recorded. With these data emerging in the last 6 to 9 months, we anticipate a deterioration in both credit quality and asset quality. Through specific proactive indicators we observe already some deterioration. For example, the Stage 2 loans indicator (performed credit exposure for which there has been a marked increase in credit risk compared with the initial acknowledgement) is at an historic high of 9.5% for all loans, even higher than during the pandemic. Our general message to the banks is that it is vital to pursue prudent policies, evaluate insolvency, demonstrate proactiveness by talking to their clients and especially to the vulnerable ones burdened by the heavier cost of living, so as to restructure their loans. Also, banks must be prudent as far as their future provisions for possible capital requirements are concerned’.
Are you concerned about an increase in NPLs?
‘We expect an increase in NPLs. The prevailing macroeconomic conditions favour an increase in non-performing loans. However, at this point, we don't see a risk of banks not being able to finance the economy or having banks fail. As I said, the capital adequacy is high, while profitability has improved, thus banks can absorb likely losses. I am not concerned about the increase in NPLs. We will provide more information, conducting stress tests in the first half of next year where we will examine the worst-case scenario.’
The Greek government is looking at ways to support the most vulnerable borrowers. What is the situation in other countries?
‘There is anxiety in many EU countries over how to support the most vulnerable citizens as regards their lending liabilities. For example, last week in Spain the government and bankers agreed to the ‘Code of good practice’, whereby banks are called on to discuss the problem with those vulnerable clients below a certain income threshold so as to find solutions such as interest moratoria for a number of months. Banks must involve themselves individually with clients to exam how much each client can pay, achieving loan restructuring, as appropriate. Proactive action is the best way to deal with these situations, and that is precisely what we are asking the banks to do’.
What risks are Greek banks facing?
‘Greek banks have managed to reduce the number of NPLs over the last three years and their profitability has risen, which is a positive development. One of the challenges that I think they’ll face is raising capital from the markets so as to fulfil the minimum requirements for own funds and eligible liabilities (MREL). Greek banks must address the markets which will be a challenge for the upcoming months. We have a general concern for all banks across Europe regarding their capability to finance themselves, since, in the light of the rise in interest rates which increases the cost, and also factors like the capability to recover and the tighter monetary policy, banks must replace borrowing from the ECB with financing from the markets’.
In terms of climate change, how does the banking system see climate and environmental risks?
‘We have an active agenda with the goal of convincing banks to reveal risks in terms of environmental parameters. We have formulated regulatory requirements which provide elements for the structure of their portfolios based on green taxonomy. We are putting pressure on banks to provide information on their strategy against the primary risk and how they see their portfolio over the long term’.
And one final question ... Where are we on the issue of cross-border transactions in banking and more specifically housing credit?
‘The correct functioning of the single market, of the possibility of there existing cross-border banking, is a subject which greatly interests us. Home loans are about mortgaging the home, which cannot be moved, and therefore the regulations on purchasing mortgages are national. However there is a great deal of movement as regards cross-border transactions in consumer credit in e-payments, credit cards’.
The interview was conducted by Maria Vasileiou
Ta Nea - To Vima, 11 December 2022