José Manuel Campa interview with L'Echo: Banks must remain cautious despite the uncertainties

José Manuel Campa (EBA): ‘Banks must remain cautious despite the uncertainties’

The Omicron variant, strong growth in mortgages, and high asset prices on financial markets are just some of the reasons why banks must remain cautious, stresses José Manuel Campa, the Chairperson of the European Banking Authority (EBA).

The European Banking Authority (EBA) celebrated its 10th anniversary this year. The EBA organises, among other things, stress tests for the largest banks in the European Union. Its headquarters are now in Paris, after relocating from London due to the United Kingdom’s withdrawal from the European Union. 57-year-old José Manuel Campa has been its Chairperson since 2019. Between 2009 and 2011, he was Secretary of State for the Economy in the Spanish Government. With a PhD from Harvard, he has also worked for Spanish bank Santander.

The Omicron variant has created new economic uncertainty. Are banks resilient enough to cope with this new situation?

Caution must be exercised with this new variant, as there is still a great deal of uncertainty. Thus far, the banking sector has fared quite well during this health crisis, thanks in particular to the measures implemented by governments and central banks. Banks now have more capital than before the onset of the crisis. Their liquidity positions have also improved, and we have observed a decrease in non-performing loans (NPL). But, at the same time, in the sectors most affected by the pandemic, we have seen a deterioration in loan portfolios. In addition to the Omicron variant and its effects on the economy, there are other vulnerability factors: high asset prices on financial markets, strong growth in mortgages, and more. It is therefore essential to remain cautious, even if banks are in a good position. We performed stress tests in July, and the results showed that banks were resilient overall.

‘In the sectors most affected by the pandemic, we have seen a deterioration in loan portfolios.’

You mentioned the need for banks to remain cautious. Does this mean that banks will introduce new restrictions on dividend and bonus payments?

Banks must make their own assessments in coordination with their national supervisors. There is no general recommendation on the issue, other than that banks must remain cautious, given the uncertainties.

Between 2009 and 2011, immediately after the 2008 financial crisis, you were in the Spanish Government. How did that different from the current crisis?

The current crisis is a health crisis. It has significant impacts on economic activity, and may, as a result, have an impact on the financial sector, and on banks in particular. 2008 was a financial crisis. Banks were overexposed to the risks of subprime lending, their risk management was not sufficiently prudent, and they were undercapitalised. At that time, banks were seen as the cause of the crisis, whereas they are now increasingly viewed as part of the solution.

‘In 2008, banks were seen as the cause of the crisis, whereas they are now increasingly viewed as part of the solution.’

Next year, climate risk stress tests will be performed on banks. Why are they important?

These stress tests will not be managed by the EBA, but by the ECB for the euro area. This year, we published the results of an exercise carried out on a sample of 30 banks. The aim was to determine their exposure to climate risk. The exercise showed that banks were highly exposed to sectors that are considered non-green. The green asset ratio (the proportion of assets that are environmentally sustainable) was below 10%. In 2022, we will publish the requirements for the information that banks must provide about climate risks. Banks will then have to outline how they manage these risks.

 

Interest rates should, in principle, stay low in Europe for some time to come. What impact does that have on banks? Do these low rates not increase the risks of a housing bubble?

With these low rates, banks’ interest margins are low, which affects their profitability. On the other hand, low-performing loans decrease because borrowers can pay their debts more easily. One counterbalances the other in a way. But you are right: this low-rate environment also has an impact on the situation on the housing market, for both residential and commercial property. Both real-estate prices and mortgages have increased, and some banks may wish to relax some of the constraints when it comes to lending risks so that they can gain a market share. And this creates potential risk.

Is the EBA still in favour of the idea of creating a European ‘bad bank’ that would pool banks’ bad debts?

The EBA made this proposal several years ago. A bad bank would be useful in general, and not only in the context of this crisis. It would help to create a more robust banking system. It would be easier for banks to remove bad loans from their balance sheets and find investors willing to buy those loans. It has not been successful yet, but there have been some initiatives in support of it in certain countries. We support the European Commission’s idea of creating a network of national bad banks, which would create synergies.

 

It is often said that banks should reinvent themselves and find new sources of revenue, but banks say this is difficult because of the regulations. They also complain about the less stringent regulation of fintech companies.

There are two sides to this issue. It is true that banks must be responsive to the challenges and opportunities that technology offers. To do so, they must redefine how they do business, and adapt their systems and their networks of physical branches. It is a process that must be continued, and one that has also accelerated due to COVID‑19. The other component of this issue is regulation. We have an approach known as ‘technological neutrality’. As a regulator, we cannot favour one technology over another. We must assess the risks that each technology causes for the financial system. The same applies to institutions, whether they are small banks, large banks or non-banking entities that provide customer services. We must assess the risks posed by these institutions and act accordingly.

 

Does the EBA still agree that there are too many banks in Europe? And what about in Belgium?

Our view is that banks must restructure their operations. Profitability is a challenge for the sector in Europe. It has been below the cost of equity for some years. Banks must therefore restructure their operations and learn how to improve their performance. Mergers are a possibility, with a view to achieving more stable banks. Another possibility is for bad banks to be eliminated and only good banks to survive, but this restructuring must occur. The issue is not to determine whether there are too many banks, but to be sure that the banks in Europe are very strong and have a sustainable business model. In Europe, when a bank is fragile, it still survives for a long time – there is no takeover or restructuring to make it stronger. This must change in order to make the banking sector more dynamic. As for the Belgian banking sector, I do not comment on specific national markets. At the EBA, we believe in the single market and it is important to develop a large European market. What is important is for a Belgian client to be able to access various banking services anywhere in the European Union, not only in Belgium.

‘In Europe, when a bank is fragile, it still survives for a long time – there is no takeover or restructuring to make it stronger. This must change in order to make the banking sector more dynamic.’

With regard to the banking union, Europe does not yet have a common deposit guarantee mechanism. It has been suggested that France will try to find a solution to this matter.

This banking union is essential. A lot has already been achieved, but there is still no common deposit guarantee mechanism. I hope that France will be able to find a solution to this issue during its presidency of the Council of the European Union, which started on 1 January.

 

As a banking regulator, what are your views on cryptocurrency?

Crypto-assets have an impact not only on banks, but also on the financial system as a whole. We must therefore cooperate closely with the other European supervisory authorities, namely ESMA for the financial markets and EIOPA for insurers. Together with ESMA, we shared our concerns about crypto-assets and their regulation with the European Commission 3 years ago. In response, the Commission published a proposal for a regulation on Markets in Crypto-Assets (MiCA), which gives us regulatory powers. It is a step in the right direction, and we must think about what these crypto-assets represent. Some now see them as investment instruments, while others see them as an alternative payment option. The EBA already has payment powers.

 

The EBA celebrated its 10th anniversary this year. How would you sum up the last 10 years and what remains to be done?

Over the last 10 years, major changes have been made. The EBA was established as one of the responses to the financial crisis. We have made significant progress in regulation, transparency and banking information. Banks are now better capitalised. Looking to the future, we must complete ongoing projects: achieve the banking union and implement the Basel III agreements. It is also important to improve the integration of new technology into the financial landscape, in order to enhance the service provided to clients while maintaining the sector’s stability. Finally, we should make sure that the banking sector is ready to support the sustainable transition of the economy, which is very important to us.

 

What are your personal hopes for 2022? A return to normal life free from Covid?

I don’t know what a ‘normal life’ is (laughs). And I don’t know if Covid is going to disappear. But if it does not disappear, I hope we will be able to integrate managing it into our everyday lives, so that the impact on the economy can be minimised as far as possible. I was very pleasantly surprised by banks’ abilities to adapt to a new environment during lockdown. We won’t go back to exactly how things were before. At the EBA, we will have more digital meetings, and that is part of our commitment to sustainability.

Key phrases

‘At present, banks have more capital than before the onset of the crisis. But caution must be exercised with this new variant, as there is still a great deal of uncertainty.’

In addition to the Omicron variant and its effects on the economy, there are other vulnerability factors: high asset prices on financial markets, strong growth in mortgages, and more.’

‘Banks must restructure their operations. In Europe, when a bank is fragile, it still survives for a long time – there is no takeover or restructuring to make it stronger. This must change in order to make the banking sector more dynamic.’