«A bad bank must be part of our toolbox to solve banking challenges»
Interview with José Manuel Campa, Chairperson of the European Banking Authority
di Isabella Bufacchi
9' di lettura
When coronavirus hit Europe, European banks were more solid compared to the Great Financial crisis 2008-2010 and more resilient to the shock: better capitalized, with liquidity buffers, less risks and less NPLs in their balance sheets. However in pre-Covid times, European banks had weaknesses too such as low profitability, low RoE, high cost-to-income ratios, weak business models in an overbanked market with huge excess capacity. How are European banks coping in this pandemic crisis, with their strengths and their weaknesses?
There are two substantial differences between the two crises you mention. Covid-19 is a health crisis and a social crisis that is having strong negative repercussions on the economy. In this economic crisis, banks play a major role to dampen the effects of the pandemic. The 2008 crisis was a financial crisis, and banks were at the core of the problem. The second difference between these two crises is given by the starting position of European banks. CET1 of European banks was 15.1% at the end of 2019, it was about 9% in 2009: and it is not only a question of numbers, as now capital requirements are much stricter. At the time of the Financial crisis, banks had no liquidity, now they have ample liquidity and liquidity ratios remain high. So European banks are now in an assertive position that allows them to play a major role to dampen the effects of the crisis. And indeed banks showed operational resilience from the start of the crisis, they were able in the very early stages of the crisis to give liquidity to their customers, with moratoria and State guaranteed loans. However the outcomes of this crisis are uncertain: we do not know how strong the recovery will be and most of all the recovery will likely have different speeds in Europe. It is natural that after this economic crisis, NPLs will increase in spite of government interventions: the impact on NPLs will have to be managed but banks come from a good capital position. As you said, before Covid-19 crisis, banks had to face two main structural challenges: low profitability and adapting business models to new technologies. These two challenges have not gone away with the pandemic, on the contrary, they have accelerated. Low interest rates are going to be low for longer, because of the pandemic, and this is going to have a negative effect on banks profitability. Moreover, the economic downturn provoked by the pandemic is going to have a negative impact on banks profitability. As for the technological challenge, in coronavirus times the use of technology has increased so banks now are more under pressure to accelerate on digitalization and technological modernisation.
How do you see the Italian banking sector coping with the pandemic crisis, as Italy has been one of the hardest hit countries by the virus and Italy has less fiscal space to speed up the economic recovery?
I don't think Italy stands out as unique. It isn't. Italian banks are like European banks as it is a common European crisis, across the EU. Italian banks represent a general trend for the whole banking sector. The economic downturn, whether in the ECB forecasts or European Commission outlook, is for all of us. But I repeat, what will make the difference in this crisis will be the different speed of the recovery. This is a big uncertainty. Italian banks reduced NPLs from 17% of total loans in 2014 to 6.7% at the end of 2019. This is a very significant reduction. And Italian banks CET1 at 14% is only slightly lower than the European average 15.1% (ndr data at the end of 2019). The coronavirus situation is not unique in Italy. Now Spain is experiencing the second wave, and contagion is very high in France and Belgium. I would not single out Italy, Covid-19 is a common challenge.
The European response to this common challenge for European banks has been adequate so far?
The initial response to the corona shock was fast and well coordinated across Europe, by the supervisors and central banks levels. But as I said, I see that the next major challenge will be given by the different speed of the recovery. These changes and these differences will have to be assessed by regulators to make sure that measures will take into account the difference of speed in the recovery of national economies.
Bankers are asking Eba, the Ecb/SSM and the Commission to go further in softening rules and make postponements even further, given the exceptional circumstances of the coronavirus crisis. In particular banks ask for more time on the new classification of forebearance and forborne applied to loans with moratoria which comes into place on September the 30th. Bankers also ask for a delay in “calendar provisioning” as it could trigger a tightening of conditions during this recession.
Calendar provisioning for NPLs is just an example of how the legislators acted fast. I would like to underline two aspects regarding calendar provisioning for NPLs: first, it applies to all new NPLs from April 2019, as required by the level one legislation, and secondly ECB has taken additional supervisory measures to extend the coverage to existing NPLs. On NPLs arising from new loans, the Commission made a quick fix, which was approved during the summer andwhich extended the preferential treatment granted to export credit agencies to NPLs guaranteed by the public sector in order to mitigate the economic impact of the Coronavirus pandemic. As for the loans with moratoria, we at the EBA acted early as well, by stating in our guidelines a key point: there is no automaticity. And we have been very clear on this and this is key. This was an exceptional measure taken at the beginning of the crisis in March. At that time, banks were not able to go and check customer by customer, loan by loan. But six months have passed and moratoria can continue if they have been agreed prior to the deadline set out in the guidelines. However, as the moratoria continue to apply, even for one year more, this will have to be taken into account in the assessment of the increasing credit risks. Banks need to perform a proper assessment of the risks facing their customers including the moratoria. Banks had six months to engage with their counterparties, there is no need now for more time. It is important that banks make the assessment of the risk profile of the clients asking for moratoria. It is a very individual assessment and it is important to allow banks to make more loans to their clients. The coronavirus crisis is uncertain, the situation is dynamic, and banks must assess all impacts and all changes in their risk assessments of customers on an ongoing basis.
You said that NPLs will increase for the economic downturn in the coronavirus crisis. Are you in favour of the creation of a Bad Bank? What is your opinion on the need of an European asset management company for NPLs or a mechanism, harmonized at European level, that would allow each member State to use its AMC at national level?
In previous crises, Eba has been in favour of European solutions. In the coronavirus crisis, there are special challenges as moratoria and State guarantees differ from State to State, they have different details and rules at national level, they are not homogeneous. We at the EBA have a mandate to preserve the single market. I believe that bad banks or AMC are a useful, valid tool. In the past the AMC has proven to be useful. A bad bank must be part of our toolbox to solve banking challenges. In the EBA we are in favour of an European approach and by this I mean a highly coordinated approach to create a level playing field. We are in a single market and it works better when we adopt highly coordinated solutions. In this case, a European AMC I believe would also be more efficient in managing assets, provide operational efficiency and synergies, it would save costs and it would be easier for it to finance itself in the financial markets. Alternatively, if national AMC are created there should be common features in their functioning so as to exploit possible synergies and preserve the level playing field.
A common European approach is represented by the Banking Union. Are you worried that the coronavirus crisis has slowed down the Banking Union process, which is incomplete without EDIS and without the ESM backstop for the Single resolution fund? Germany is aiming, during its semester and Presidency of the EU Council, at reaching a decision on a road map for EDIS by year end.
I am optimistic on the completion of the Banking Union, it will go forward. For two reasons. First, there is a broad consensus that the Banking Union is not complete and that it needs to be completed with EDIS, so that deposits are treated in the same way in all countries. Europe has always solved its previous crisis with more integrated projects. The EBA for example was established in 2011, as a result of a crisis. The sooner the Banking Union will be completed, the better. It is good to hear about the German semester aim: a decision on a clear road map for EDIS by the end of the year would be a big step forward. But to complete the Banking Union we also need the backstop to the Resolution Fund. It is very important to give clarity, when a bank is resolved.
Do we have this clarity in the bail-in approach and regulation for banking resolutions?
We have the BRRD directive. It is our basic regulatory framework, it gives room to national implementations and interpretations. I would not put into question the whole framework. But I agree that there might be the need for quick fixes, as we did for the CRR on prudential issues. The overall bail-in system for significant institutions remains robust. National governments are involved in less significant institutions. What is most important is having a framework that addresses the issue of stability and avoids systemic risks, on significant institutions. Less significant institutions do not entail systemic risks. We just need for them an orderly system. In the US, banks disappear without the perception of systemic financial risks. And that is because resolution is done as an orderly exit. It should become more so in Europe. Banks should be able to be resolved like non-financial corporates.
Other big steps forward are being made with M&A and consolidation, at national level at least: what is your opinion? More should be done to improve profitability and cutting costs through crossborder mergers and acquisitions?
In my opinion, consolidation is a means to achieve a goal, the goal being a more sustainable business model to address three challenges: low profitability, digitalization and excess capacity. Banks have to tackle costs because profits are too low and consolidation is a means to improve the business model. Other options include the exit of those banks that are not cost efficient and lack viable business models, the entry of a good banks in new markets, more internationalization and cross-border activity in Europe, and more Fintech. From the point of view of regulators, consolidation has to make banks more efficient, sounder, capable of offering better services to clients. I call it “creative and destructive”, the good entities go forward and increase their market share, the bad one exits and loses market share. During Covid, banks are investing more in technology and cutting costs, reducing branches. It is important that banks give adequate value to all stakeholders to employees, clients, customers, and shareholders.
Talking about Fintech and electronic payment systems, the European (and German) markets have been shaken by the Wirecard collapse. Don't you think something went wrong when Wirecard was classified by supervisors as technological company and not as an electronic payment system global player? What are the implications of the Wirecard scandal?
We are following closely Wirecard. There are a number of issues relevant for the EBA. From the perspective of prudential supervision only the relatively small Wirecard Bank, which I believe will be ultimately sold, was supervised by BaFin. As for the payment systems, that is services to customers, Wirecard was supervised in the UK by the FCA. Services have continued to be provided, there was no disruption. Another big issue brought up by the Wirecard collapse is anti-money laundering. The group overall was not supervised on money laundering. So we need a more coordinated approach in Europe and I am glad that Germany and the European Commission have picked this up and there is now a consultation on this issue. We have contributed to this Consultation. First, we need common rules on anti-money laundering. At the moment, this area is regulated via a directive but it gives too much room for implementation at national level. So I see the need for more common European regulation on money laundering, and not only on financial institutions as money laundering goes well beyond finance. Having that, it would be easier then to establish an authority for direct supervision
Could Eba become the European Authority for Money laundering?
It is premature to comment on this. We need at first European common rules. Then we will be able to decide how to apply them, with which resources, which tools.
You mentioned UK supervision on Wirecard. But Uk now means Brexit. Is Eba ready for Brexit? Are European banks ready for this unprecedented event?
Banks are prepared. At the beginning of this process, they were slow in moving their clients from the UK to Europe. But now they have been accelerating that process. I see no systemic risk and, at this stage, there are no concerns in terms of financial stability. But it remains an event full of uncertainties.