BEGIN:VCALENDAR VERSION:2.0 PRODID:-//Date iCal//NONSGML iCalcreator 2.20.2// METHOD:PUBLISH X-WR-CALNAME;VALUE=TEXT:European Banking Authority BEGIN:VTIMEZONE TZID:Europe/Paris BEGIN:STANDARD DTSTART:20201025T030000 TZOFFSETFROM:+0200 TZOFFSETTO:+0100 RDATE:20211031T030000 TZNAME:CET END:STANDARD BEGIN:DAYLIGHT DTSTART:20210328T020000 TZOFFSETFROM:+0100 TZOFFSETTO:+0200 TZNAME:CEST END:DAYLIGHT END:VTIMEZONE BEGIN:VEVENT DTSTAMP:20211205T081331Z CREATED:20210816T073758Z DESCRIPTION:More bad loans and extra work for banks on the horizon\n\n\n\nI nterview with José Manuel Campa\, Chairperson of the European Banking Auth ority (EBA) on the conditions and challenges facing banks in the Union\, a nd on their future\n\n\n\nSpanish banker and economist José Manuel Campa h eads the European Banking Authority (EBA)\, headquartered in Paris. Establ ished 10 years ago\, the EBA is responsible for the single rulebook and su pervision of banks in the Union. It is also responsible for carrying out s tress tests of the largest systemically important European banks.\n\n\n\nL ast year the European economy contracted by more than 6% as a result of th e pandemic and the measures adopted to stem its spread. This also had cons equences for the banking sector. How successfully have European banks resp onded to the problems connected with COVID-19?\n\n\n\nBanks have\, of cour se\, a major role to play in supporting the economy and its recovery\, so it is important that they should be well capitalised and have sufficient l iquidity. At the beginning of the crisis\, in the first quarter of 2020\, they achieved high levels of capital and liquidity\, which further increas ed over the course of the year. This was partly due to action taken by mon etary authorities to guarantee liquidity\, and partly to fiscal measures t hat introduced moratoria on loan repayments and a range of public guarante e schemes implemented by banks. At the end of last year\, banks on average had high capital ratios\, which were higher than at the start of 2020. Th e same applies to their liquidity ratios\, which were also higher than at the beginning of the year.\n\n\n\nSo European banks have responded well to the crisis conditions?\n\n\n\nYes\, I would say so. Right at the start of the crisis\, banks showed operational resilience in that they were able t o service their customers at the height of the tension. They then also sho wed an ability to listen to the needs of households and businesses by prov iding liquidity and through loan repayment moratoria. Our assessment so fa r is that\, overall\, the credit sector has performed well in terms of sol vency\, while the capital ratios of banks also remain high.\n\n\n\n \n\n \n\nWould it be true to say that banks have learnt something from the prev ious financial crisis?\n\n\n\nYes\, I think they have. Not only that\, but in the 10 years since the last crisis we have built a better banking syst em\, with far higher levels of capital and liquidity. At the end of 2011\, for example\, the capital ratio of Core Tier 1 banks was on average 11%\, while at the beginning of last year it was 15%\, in other words four perc entage points higher. The regulatory framework we have established has als o contributed to better bank governance in difficult circumstances.\n\n\n \nCertainly\, although on the other hand we are seeing that bad\, non-perf orming loans are on the increase again in some parts of the economy and th at some countries are also increasingly seriously affected by the conseque nces of the pandemic and lockdowns that are still ongoing. As far as the i ncrease in bad loans is concerned\, what is your view of the present condi tions and the future development of these events?\n\n\n\nIt is absolutely the case that the crisis will cause losses on banks’ balance sheets and wo rsen the quality of loans. The volume of non-performing loans has been dec lining on average in the EU since the end of last year\, but\, as you say\ , some sectors and countries are more badly affected. In some countries th e share of bad loans will increase in the coming quarters\, especially if they are not covered by government guarantees. As you know\, the EBA is cu rrently in the middle of conducting stress tests. We will publish the resu lts in July and these will help us understand how individual banks are per forming. I believe that the share of non-performing loans will increase\, but\, as we have said\, the current position of banks is good\, so they wi ll be able to absorb it.\n\n\n\nOn the subject of bad loans\, there has al so been some discussion of the possibility of establishing a kind of Europ ean bad bank. This would\, of course\, be a demanding and lengthy project. Is it a good\, feasible idea?\n\n\n\nThe idea that has been circulating o f a bad bank has arisen because of the issue of the management of bad\, no n-performing loans\, which are likely to increase in number. If there are more of these loans\, banks will have to manage them and will look for a b ad bank that can be actively involved with them. From this point of view t here would be advantages from a larger market that would attract investors \, and this market would be European. Frankly\, my understanding of this i s that the proposals are not aimed at setting up a European bad bank as su ch. Rather\, the idea is to set up a network of national bad banks that al ready have experience of how to manage assets and how to securitise them. It would be good for these practices to be common and coordinated among di fferent national bad banks.\n\n\n\nYes\, we know this in Slovenia because we have been through our own rather painful and expensive bank recovery an d we set up a bad bank just under 8 years ago. How\, in the light of this\ , do you see the Slovenian banking sector now? Is it sufficiently resilien t\, capitalised and solid to be able to navigate the difficult conditions of a health crisis?\n\n\n\nMy impression is that the banks in Slovenia hav e restructured and\, according to the information I have\, their level of capitalisation is good and even slightly higher than the EU average. The l evel of non-performing loans is also good and the ratio is favourable. It appears that the banks are in a relatively good state\, which is something that also applies to the EU average. Naturally\, I do not have detailed i nformation on the characteristics and situation of individual banks\, but my general impression is that conditions are good.\n\n\n\nRegarding the re gulation of loans benefiting from moratoria on loan repayments\, proposals have been made in Slovenia\, including by the Ministry of Finance\, to ex tend moratoria on loans taken out in more crisis-affected sectors of the e conomy. What do you think of this?\n\n\n\nGood question. As you know\, we have a number of guidelines regarding the moratoria that ended in March. T he EBA’s clear position is that it is a good thing that these moratoria ha ve ended. Moratoria were extremely helpful during the crisis\, but now\, a year on\, it is time for individual assessments of the needs of individua l customers\, rather than for generally applicable rules in this sector. E xisting regulations already provide opportunities to defer loan repayment if the customer is entitled to it and the bank agrees to it. In short\, a year on\, it is time for banks to address their customers’ needs individua lly\, on a case-by-case basis.\n\n\n\nWhen it comes down to it\, that is a lso what bank managers are paid for.\n\n\n\n[Laughs] Yes.\n\n\n\nGoing bac k to this year’s stress tests of the largest banks in the EU\, can you exp lain to us the key elements of the baseline scenario and the risks of the adverse scenario which the EBA is testing in banks in the event of a deter ioration of financial conditions?\n\n\n\nThe position this year is differe nt from that in previous years. In the light of conditions\, we have\, as you know\, prepared two scenarios. The first is the baseline scenario that is largely forecast by the European Central Bank\, while the second is th e adverse scenario that would occur if conditions deteriorated. This adver se scenario is extremely severe.\n\n\n \n\nBanks need to improve profitabil ity and must address cost reductions and risk structure\, together with th eir customers.\n\n\n\n\nIt assumes a contraction in GDP across all EU coun tries\, and the difference in forecast economic growth between the baselin e scenario and the adverse scenario is the biggest out of all the stress t ests we have conducted. This severity is important since it provides an un likely\, but still possible scenario. Our assessment for the time being is that even in this case the banking system has sufficient capital\, while the stress tests are verifying this at each individual bank and will enabl e national bank supervisors to see how they need to develop supervision in order to ensure that the system remains robust.\n\n\n\nGiven the conditio ns\, the risks and the fact that\, according to the most recent figures fr om Eurostat\, the economy of the EU and the euro area also contracted in t he first quarter of this year\, what is the probability now of new problem s and a possible crisis in the financial sector as well?\n\n\n\nThe risk o f a financial crisis\, as you describe it\, essentially depends on two poi nts. The first is the speed and scale of the recovery\, which will depend on how we bring the pandemic and the health crisis under control and how s uccessful the vaccination programme is. The second aspect\, as we have alr eady said\, will be the action taken and whether fiscal support remains. A s regards the speed and scale of the recovery\, we are observing a signifi cant delay in vaccinations compared to our expectations a few months ago\, but new vaccines will probably still be achievable\, which is good. As re gards fiscal and monetary support\, governments are guaranteeing that thes e will continue\, and this will also include support for banks. I believe that these two aspects will also help banks with management during the rec overy phase. It will still be extremely important for them to continue to monitor the quality of loans. If they notice a deterioration\, they will h ave to acknowledge the situation quickly and help their customers to the b est of their ability. Naturally\, banks will also have to ascertain how po tential bad loans would affect their capital.\n\n\n\nThe EBA has also reco mmended that banks adopt a ‘green asset ratio’ (GAR) to show how their pol icy is environmentally sustainable. Have these environmental recommendatio ns also been adopted by bankers and the banking community? How can capital profits and environmental protection go hand in hand?\n\n\n\nAs you know\ , the EU has prepared a long-term strategy that envisages climate neutrali ty by 2050. This requires a change in our productive and economic activiti es and\, of course\, banks must also follow this path.\n\n\n \n\nMoratoria were extremely helpful during the crisis\, but now\, a year on\, it is tim e for individual assessments of the needs of customers\, rather than for g enerally applicable rules in this sector.\n\n\n\n\nThey must first ensure that such activities are adequately funded. Even more importantly\, they m ust ensure that adequate funding is available on favourable terms and with proper risk analysis. From our point of view\, we have presented this gre en asset ratio. This is a matrix through which banks can communicate with their stakeholders and present their strategy to them\, so that they can b etter understand how the bank will work on its environmentally sustainable agenda\, how the bank as an institution imagines climate neutrality by 20 50 and how it intends to finance the economy. I think that banks are ready for this challenge and willing to take part in it. In answer to your ques tion about whether there is a trade-off between profits and environmental protection\, I can tell you that I do not see a compromise here\, since it is not possible to confuse short-term profitability with long-term risks and long-term sustainability. I believe that for banks it is the long-term picture that matters\, that they are about long-term\, sustainable develo pment\, long-term viability and long-term profitability. That is why they must work sustainably and participate in the green agenda.\n\n\n\nThat’s t rue\, but in the end it is the owners and managers of banks who need to ma ke up their minds first. They must first internalise this green agenda wit hin themselves.\n\n\n\nOf course. It is a question of deciding how they wi sh to position themselves in the sustainable and green agenda. That is why we consult with banks on environmental\, social and corporate governance (ESG) and strategy. Banks need to communicate about it\, explain how they see their role\, what activities they intend to finance\, what risks they now have in their balance sheets from a green perspective and what kind of risks they intend to have in their balance sheets in the medium and long term\, say in 10 or 15 years – and what their strategy is during the trans ition period until then. I am pleased that many banks in Europe are alread y communicating this to their stakeholders\, explaining to them what they are no longer willing to finance and that they want to be climate neutral by 2050. These steps are now moving forward.\n\n\n\nBanks have been facing new competition from financial technology companies for some time. And ba nkers complain that fintechs are less regulated and supervised than banks\ , so that market conditions are more favourable to their competition\, whi le they themselves are too restricted by regulations set by the ECB\, EBA\ , and so on. What is your view on this?\n\n\n\nWe are also actively involv ed with fintechs and digitisation. You are absolutely right that banks are a sector that is intensively regulated. Our view is that we should be neu tral towards technology and should only assess the risks that it brings. I n short\, technology that brings the same risks to the system should have the same regulations. Of course\, it is also important who manages this te chnology and how it will affect the other activities that this entity perf orms. In the case of banks that take deposits from customers\, it is of co urse important that these deposits are adequately protected. On the other hand\, not all fintechs take deposits from their customers and we need to evaluate this carefully. In the case of the digital agenda\, we need to as sess which parts of the regulatory framework new competition is appearing in\, how it works and the ways in which regulations are oriented against o r in favour of new players. We do this systematically. For example\, many new players are appearing in the payments sector\, on the basis of rules t hat are set not only by banks\, but by all payment institutions. The secon d is the area of crypto payments\, where we believe there are still gaps i n the regulatory framework that need to be addressed. The European Commiss ion has submitted a legislative proposal\, which is now under public debat e\, and we hope that it will be adopted later this year.\n\n\n\nIn your op inion\, what are the main challenges that European banks will face in the next 5 years?\n\n\n\nI see at least two challenges in the medium term. The first is the question of the profitability and sustainability of their bu siness models. Return on capital in the industry has to date\, in recent y ears\, been low. Banks need to improve profitability\, they need to deal w ith cost reduction and risk structure\, with their customers. The second a spect\, closely related to the previous question\, is how to meet the chal lenges of digitisation and technology. This means that banks need to adapt their business models and invest in new ways of doing business. This is a challenge that has only been exacerbated by the health crisis. Another im portant challenge that banks need to prepare for is sustainable orientatio n\, which has already been mentioned.\n\n\n\nAs you know\, there are also plans for a pan-European anti-money-laundering agency. The EBA gained new competences in this area last year. Would you like to take on this job you rself?\n\n\n\nI think we are ready for that. Since last year we have had a mandate to implement an anti-money-laundering policy in the EU\, and we h ave been actively doing so for more than a year. It is true\, however\, th at our mandate is rather limited for the time being\, and most of the supe rvisory work is performed by local authorities or local anti-money-launder ing bodies. We have told the European Commission that this is problematic from the point of view of communication\, coordination and the prosecution of these offences\, so we strongly support the Commission’s proposal to s trengthen regulation in this area. We hope that the European Council and t he European Parliament will agree\, because in this area the EU is only as strong as its weakest link.\n\n\n\nAnother of the challenges of the futur e is the digital euro. The ECB is due to make a decision on this in July. What is your view of it? Is it a new risk or a new opportunity for banks? \n\n\n\nNew technologies tend to bring new products\, opportunities and ri sks. I think there are a lot of new opportunities here and indeed banks ar e already using distributed ledger technology (DLT). As far as digital cur rencies are concerned\, we must\, of course\, distinguish between those is sued by central banks – and the ECB already has a plan for how to proceed if it decides to do so – and privately issued digital or cryptocurrencies. For the latter\, we would need to assess what they bring to users and whe ther the added value they bring is proportionate to the risks they could p ose.\n\n\n\nFinally\, the EBA has celebrated its 10th anniversary this yea r. How do you see the institution?\n\n\n\nYes\, the EBA was established in the middle of the last crisis and began operations in 2011. And when we w ere talking earlier about how the banking sector came out of the previous crisis and how it has come out of this crisis\, and how banks are now stro nger and better prepared to support the economy\, we are happy with what h as been done in these 10 years. There is more to do: we are still in the i nitial phase as far as the institution is concerned\, but we are pleased w ith the achievements of these last 10 years.\n\n\n\n \n\n\n\nThe interview was conducted by Miha Jenko.\n\n\n\nDelo\, 8 May 2021. DTSTART;VALUE=DATE:20210508 DTEND;VALUE=DATE:20210509 LAST-MODIFIED:20210816T074107Z SUMMARY:José Manuel Campa's interview with Delo: More bad loans and extra w ork for banks on the horizon URL;TYPE=URI: erview-delo-more-bad-loans-and-extra-work-banks-horizon END:VEVENT END:VCALENDAR