François-Louis Michaud's interview with Banking Risk & Regulation on windfall taxes, Cop28, AML and gender equality.

Q&A: François-Louis Michaud, EBA

François-Louis Michaud is three years into his term as executive director of the European Banking Authority. He shares his views with Banking Risk & Regulation on windfall taxes, Cop28, the EU’s highly-anticipated AML Authority and tackling gender inequality from the top.

The EBA praised the ‘robust’ nature of the bloc’s banking sector in its latest stress tests in July. How can you be so sure of that after the US banking crisis and the rescue of Credit Suisse in March?

The timing was good because we had this episode in the US and in Switzerland when we started the stress tests. It was handy to have the outcome in July shortly after this shock to check sector resilience.

It was the most severe shock-scenario we had run – and still banks on the whole fared pretty well.

We had 20 more banks – covering 75% of the banking assets of the bloc – compared to 70% the last time. We looked into 20 specific sectors to see how certain banks would be more exposed to certain parts of the economy.

We couldn’t perceive any obvious areas of very strong weaknesses for the banks, including real and commercial real estate.

Since we had the question of US banks potentially sitting on unrealised losses from bond holdings, we complemented the exercise with an ad hoc module, which looked at all those holdings from banks. We applied a very conservative approach to see what the valuation of those holdings could be and how that would affect their capital positions.

Again, there were no hidden losses held by banks in the sample.

That was well received by market participants in July because there were a few days at the beginning of the ECB and Credit Suisse crisis, where there were doubts about the resilience of the EU banks.

The market was checking whether there could be contagion effects on certain EU banks. That did not materialise. That was short-lived.

Then a few months later we provided this big picture, saying ‘We’ve been looking at a number of ways into this and we don’t see any obvious risks or areas of concern.’

Now of course one can never know in advance how certain disruptions could spread and market dynamics are not something that can easily be predicted.

Our stress test scenario doesn’t try to speak to that. That doesn’t mean that we don’t expect asset quality deterioration in the future quarters because the situation will probably deteriorate, but at the moment the picture is relatively positive.

What is your medium-term outlook?

We’ve been expecting a slowing down of the economy and we know that energy intensive sectors might be more directly affected. We also see some tensions in real estate and especially organised markets. But so far from an asset valuation and asset quality perspective, we don’t see the signs of any deterioration.

ECB executive board member Isabel Schnabel says most European banks are “insufficiently considering” climate-related risk in their credit assessments. Would you agree with this view – and what should bank chief risk oicers’ immediate steps be?

This is a widely shared assessment. Banks and boards are fully convinced that they need to make progress there. But we need to keep pushing collectively, so that no one slows down their efforts.

This is the need to integrate climate risks into banks’ corporate governance, internal control frameworks, risk management procedures and processes, and the way they originate credit risk.

How can we support that as best we can?

First, we developed guidance for banks on how they can best manage those risks. We are developing a stress testing framework, also for climate. We are running an exercise together with the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority next year.

It’s not as granular as the EU-wide stress test we ran in July but it will be published at a relatively high level.

We’ve also just published in October a report that recommends enhancements on how banks take that into account in their capital management.

It’s challenging but it’s important that we tell banks and financial entities: ‘These are the expectations, these are the tools, please work and get the data and all that down into your systems’.

Of course, we cannot afford to be constantly adding up. We should be demanding. But we should also give them time to implement. I think that’s also important.

What consensus might be achieved at Cop28?

There is still a shared awareness at the Cop28 level that we need to carry out structural changes in a timely way to achieve a smooth transition.

There’s a common agreement that this is difficult, that it will take time and it will of course be costly because the reallocation of capital means a lot of adjustment costs to carbon intensive sectors.

This needs to be carefully planned ahead. So we’ve been advocating since the beginning a timely transition.

Our fear is that people do not do their homework and suddenly will say, ‘Okay, I need to exit that sector or I need to stop funding that part of the economy,’ which would be absolutely detrimental.

But if people keep doing a good job and assessing the risks and monitoring how dieffrent types of corporations evolve their business model and operating models, then this transition is possible.

If we want this orderly transition, we want to work on three aspects as a sequence.

One is we need more and better data. This is why we’ve been working on disclosure, transparency and how banks and boards talk about their exposure or their environmental footprint.

Secondly, we need people to develop the risk management tools.

And finally, we need maybe also to translate that into capital requirements. But that’s in a sequence after we first look at transparency. We don’t recommend immediate capital requirements because we believe what matters is the transition.

We’ve just published a report on that which was requested from us by the Commission where we explain how banks can do a better job in the short, medium and long term to address those risks and whether certain activities are more exposed to losses in the future because of environmental footprint.

Does the EBA have a position on windfall taxes?

I would say yes and no. First of all, it’s the privilege of governments to decide taxes so I’m very careful not to overstep here.

We know the banking sector has been benefiting in recent quarters from very good market and economic conditions, which has boosted their profitability. So, there’s this view that ‘Okay, governments are busy supporting households and firms and the financial sector should be part of that’. That’s the rationale.

At the same time, it should not be lost that strong banks are necessary for the funding of the economy. It’s true that banks have, for a long period of time, been suffering from subdued profitability in the EU. That should also put it in perspective.

We know that the economic outlook remains pretty risky. So higher profits for banks are important for them to beef up their capital positions and to be in a position to withstand a future deterioration in asset quality. But also to improve their efficiency and resilience as well. The windfall has a rationale but that should not come in the way of banks being sufficiently well equipped to support the funding of the economy in the medium to long term.

How should the EU step up efforts to combat money laundering?

The intensity of anti-money laundering work done by banks and supervisors has totally changed and the EBA has been very supportive of that. We’ve developed a lot of guidance, tools and coordination to support those efforts.

Now we are preparing to hand that over to the AML Authority when it is established, hopefully in 2025.

That in itself is a game-changer, having a dedicated authority in Europe dealing with that and supported by regulation.

Since the EBA told us of its plans to measure banks’ progress on tackling gender inequality and how it boosted diversity among its own ranks, what progress has been made? How is the EBA gearing up for its peer review of regulators’ progress at the end of 2024?

If we look at the overall picture of women in the banking sector, we started working on this in 2015. While the situation has improved, banks still have a lot of work to do.

We see that 56% of institutions in our sample have not even one female executive director. If you look at the C-suite, the situation gets even more challenging – where only 18% of executive directors are women.

And this figure is only 11% for CEOs and 10% for chairs. So that is not exactly a reassuring or comforting picture.

There are signs of hope, however. If we look at age brackets and recently recruited directors then the situation is slightly better.

But frankly, there’s still a long way to go before the situation is improved, which is why we continue to raise this issue.

We also looked at the topic of equal pay for women and men.

Our analysis shows that imbalances for directors on remuneration still exist. On average women executive directors receive 9.4% less remuneration than their male colleagues. Some 27% of institutions still don’t have a mandatory diversity policy.

That’s also a picture that urgently needs to change.

We also run peer reviews at the EBA and competent authorities to compare the effectiveness of the supervisory activities and the implementation of those provisions.

It’s about checking how each single supervisor tries to push banks to take this on. So we are thinking of using that and we will probably be in a position to publish results.

At the EBA I put together a task force specifically on that which I’m chairing every week.

We’ve much improved our ratio at the management level. As an organisation, the EBA was always relatively balanced like 50/50 in terms of male and female at staff level in general.

But for directors, which is the level that reports to me, we had one female director out of four. We now have three females out of five so we have a 60% ratio instead of a 25% ratio.

We can also have a good impact on the community at large because a lot of our recruitment also comes from competent authorities. That means they will also need to make sure that they can present good female candidates which we hope will have a ripple effect across the EU.

Change is possible. That’s our message.

The interview was conducted by John Crowley

Banking Risk & Regulation