François-Louis Michaud's interview with Handelsblatt: Uncertainty is greater than ever before

Uncertainty is greater than ever before

Supervisor François-Louis Michaud considers the banks to be well positioned for the consequences of Trump's tariff policy. He sees room for improvement in recognizing risks.

Frankfurt. In the view of the EU Banking Authority (EBA), European financial institutions are well prepared for the challenges posed by US customs policy and the turbulence on the financial markets. ‘We are monitoring the situation closely, but we see no cause for alarm,’ EBA Executive Director François-Louis Michaud told Handelsblatt.

Given the war in Ukraine and threatened disruption in global trade, uncertainty was ‘greater than ever before’, Michaud stressed. ‘But the European banks can take on these challenges from a position of strength.’ They have higher capital and liquidity buffers and are also significantly more profitable, he explained. ‘And they have now been trained to switch to crisis mode and survive difficult times.’

However, Michaud sees room for improvement in identifying and assessing risks. ‘Many banks still have deficits in managing and processing data and information in their risk departments,’ he said. ‘This includes the question as to whether financial institutions get all relevant information they need to correctly assess potential risks.’

Mr Michaud, US president Donald Trump’s tariff policy and his attacks on the Federal Reserve have caused the markets to swing wildly. How dangerous is this for the financial system?

We are monitoring the situation closely, but we see no cause for alarm. There has already been increased volatility in the last five year due, among other things, to Covid, the war in Ukraine and the sharp rise in inflation. However, the financial markets in the EU, and especially the banks, have coped well.

Why is that?

Following the global financial crisis in 2008, we significantly increased security in the banking sector, primarily through higher capital and liquidity buffers and stricter supervision. Today, many institutions in the EU are far more profitable than in the last decade. And they are now trained to switch to crisis mode and survive difficult times. They proved this during the collapse of Silicon Valley Bank and Credit Suisse in 2023.

We are used to banking supervisors always warning of risks. But in this case, they sound optimistic despite the difficult economic conditions. Why is this?

You are right: it is in the nature of our business to be worried. Regulators and supervisors have repeatedly warned of risks and potential crises. In fact, there have been no disasters in the EU banking sector for years – despite Covid and the war in Ukraine. This should give us confidence, even in the current situation. I don’t believe in prophets of doom.

So a global trade war and turbulence on the markets can’t affect European banks?

I didn’t say that. The situation is difficult: there is war in Europe, and we don’t know what the future holds for global trade. Uncertainty is greater than ever before. But European banks can take on these challenges from a position of strength.

But the share prices of many banks have recently fallen significantly. The costs for investors seeking to hedge against bank failures with credit default swaps (CDSs) have increased.

This is a natural development in the current environment, and is not significantly different from other sectors. Banks are always a mirror image of the economy. The extent to which they will suffer from the trade conflicts will probably only become clear in a few months’ time, when permanent customs rules are in place in the US and other major nations.

Many investors are concerned about the big swings in US government bonds. According to a media report, Petra Hielkema, the Chairperson of EIOPA – the insurance supervisory authority – warned at an internal meeting that this could jeopardise the status of bonds as a safe haven for investors. How do you see this?

The dollar and US government bonds have been considered safe havens for decades. In my view, nothing will change in the short term. We will have to wait and see whether the fluctuations in US government bonds are permanent or are just temporary reactions to the current political debates in America. Therefore, we should not draw any reckless conclusions at this stage.

How should European banks deal with the uncertainty surrounding the US tariffs?

Banks need to understand how potential tariffs would affect, among others, their corporate clients, their supply chains and their business models. For example, do borrowing firms have enough market power to sell their products at higher prices if needed? Also, as part of our stress test, we are currently analysing the consequences that growing geopolitical tensions have for individual banks. We will present the results in late July or early August.

Some experts fear that, in the current environment, private equity firms and private credit funds could come under pressure. They fall into the category of non-bank financial institutions (NBFIs), which conduct bank-like business but are not monitored as strictly as traditional financial institutions. How great is the risk of a crisis in the NBFI sector spreading to the regulated institutions?

The direct involvement of European banks in the NBFI sector is low – most recently, shadow banking represented just under 10% of all assets across the sector. However, it is difficult to estimate the extent of the indirect effects if problems arise in the NBFI sector, because we don’t have enough data to do so. Therefore, we are monitoring the situation on the markets very closely.

Can individual financial institutions better assess what burdens they could face in the event of problems in the NFBI sector?

Many banks still have deficits in managing and processing data and information in their risk departments. This includes the question as to whether financial institutions get all relevant information they need to correctly assess potential risks – and not only in the NBFI sector. Like other supervisory authorities, we see room for improvement in this area.

You have praised the stability of European banks. So do you even need to tighten the regulations? The EU has begun implementing the internationally agreed rules, known as Basel III, almost in full. Yet in the US, it is doubtful whether any of the regulations will be implemented.

These global reforms are important to make the banking sector resilient. They should be introduced worldwide to ensure a level playing field. And they are indeed introduced in the vast majority of countries. The UK has only postponed its introduction to next year, but what happens in the US is indeed unclear.

In this context, the EU has postponed part of the Basel Ill reform – stricter rules for market-price risks – until 2026.

These regulations are expensive for some institutions that compete directly with American and British banks. The European Commission is currently consulting the industry on the way forward, but even the banks are very divided on this issue.

Would it be a problem from your point of view if these regulations were ultimately shelved?

This is a decision made by the legislator. We value the planned regulations because they improve banks’ risk management. However, many banks have already improved their risk management in anticipation of the reform. We see good momentum there.

Many banks would also like to delay or cancel the tightening of other regulations that make lending more expensive, for example for loans to businesses without ratings. What is your position on this?

My personal view is that the banking reforms are also good for the sector itself. Therefore, we should implement it. We have seen in past crises that these stricter regulations have helped institutions deal with shocks. However, the decision is down to the legislator.

Unlike in the US, international banking regulations apply to both large and small institutions in the EU. Although there is relief available for small institutions, many of them feel overwhelmed. Should we abandon this single rulebook for big and small?

I would tread very carefully with that. EU banks should be able to operate equally actively in all Member States. This works most efficiently with a single rulebook; it is the only way for banks to benefit from economies of scale.

Small banks don’t have many of those.

With the 2023 collapse of Silicon Valley Bank in the US and other institutions, we saw the dangers of smaller banks not having to adhere to international standards and being less strictly monitored. It is a balancing act to simplify the rules for small institutions without undermining their stability.

In Germany, it is mainly small savings banks and credit unions – which are much smaller than Silicon Valley Bank – that want exemptions from the EU rules.

We are endeavouring to further simplify the regulations for small institutions. Together with the European Central Bank, we are exploring whether and how to further harmonise the information that all banks have to report. This year, we want to put a lot of energy into the question of which data points we really need and which we can do without.

Many small banks will be happy to hear this. But many believe it would be best if they simply did not have to comply with the common European regulatory framework.

I think we can still ease the burden while maintaining the spirit of a common regulatory framework. If that is not enough, we will have to explore other avenues.

The ECB is currently responsible for monitoring all banks with a balance-sheet total of over EUR 30 billion. The German savings banks are calling for the threshold to be raised to EUR 50 billion. What is your opinion of this?

I don’t want to comment on that. But it is fundamentally true that there is a very wide range of very different institutions that are significant and are monitored by the ECB. Further gradations in the intensity of monitoring are conceivable here. This is certainly a topic that we will be looking at.

Several banks are currently trying to make major acquisitions. Do you think it makes sense to consolidate the sector?

Banks should decide for themselves; we are agnostic. The coexistence of large and small banks is a stabilising factor. However, economies of scale play an key role for profitability in banking. This is why we consider mergers positive and why we also think cross-border acquisitions in the EU are a good thing. This will create banks that are large enough to accompany major EU companies globally.

Is there a need for larger banks in the EU that can compete with the major US institutions?

If you compare the largest banks in Europe with those in the US, you can see that there are major differences in balance-sheet size and market share. This may potentially raise competition concerns, and the EU should also ask itself why there were mergers in the US after the global financial crisis, but hardly any in Europe.

Many banks attribute this to the fact that the banking union, which includes a common deposit guarantee scheme, was never finalised. Conversely, there is a single market in the US.

The fact that the single market is not fully harmonised is certainly not ideal for banks. This is due not only to the lack of a banking union, but also to different insolvency rules, tax systems and consumer habits in different countries. However, it is also important to note that many banks in the EU have so far simply lacked the will to take on cross-border mergers – due, among other reasons, to them fearing political opposition to such transactions.

The interview was conducted by Yasmin Osman and Andreas Kröner

Handelsblatt (Germany)