François-Louis Michaud's Interview with Les Echos: ‘Banks have learnt a lot from the different crises over the last ten years’

The European Banking Authority has published, together with the European Central Bank, the results of the stress tests used to assess the resilience of banks in the event of a major crisis. François-Louis Michaud, EBA’s Executive Director, discusses the lessons learnt from these successful tests.

What do you make of the results of the stress tests on European banks?

The results of these tests are very encouraging. They reflect the resilience of the European banking sector. We have assessed the impact of the most severe scenarios simulated to date. However, the vast majority of banks emerged with a sufficient level of capital, i.e. higher than the minimum regulatory requirements.

Given the current context of economic slowdown and high inflation, are these results rather reassuring?

The economic cycle has changed completely in recent months, with inflation, rising interest rates and geopolitical tensions. An exercise like this one provides clarity on the health of the sector.

Have banks managed to shore up their finances despite the succession of crises in recent years (sovereign debt, COVID, Ukraine)?

Banks have shown strong efforts to learn over the decade following the eurozone crisis. They have worked hard to improve both their capital position and their cost structure, although there is still work to be done in this area.

They have also reduced the risks on their loan portfolios with sounder lending policies. This explains the limited losses experienced even when extreme scenarios are considered, such as the adverse scenario in the stress tests.

Financial supervisory authorities  have also helped to strengthen the sector’s defences by raising their expectations for the sector as a whole.

Can the stress tests predict crises like those experienced recently with SVB in the United States or with Credit Suisse?

Our stress tests and the ad hoc study on unrealised losses in bond portfolios provide real transparency on the financial situation of banks and their capacity to absorb shocks. They were carried out on a large and representative sample (75% of banking assets in the Union).

In addition, the same regulatory framework applies to all banking institutions in Europe, unlike in the United States. There have also been attempts by speculative investors to test certain European banks after the March crisis. But they didn't work.

In this context, do we need to change the tools used to test the resilience of banks?

The recent crises that have shaken the sector, particularly in the United States, show that things can change very quickly. Deposits, which are normally considered as stable resources for a bank, can quickly evaporate. And new technologies are likely to accelerate this trend. We will need to consider these issues in the future.

But we shouldn’t rush. For the time being, we have the tools we need to properly assess the health of banks. There is no cause for concern at this stage.

The interview was conducted by Romain Gueugneau

Les Echos (France)