José Manuel Campa interview with Nezavisen: The banking system should be a key player in ensuring growth

The banking system should be a key player in ensuring growth: Interview with José Manuel Campa, Chairperson of the European Banking Authority (EBA)

The independence and transparency of central banks and regulators are not just desirable—they are crucial for achieving financial stability and fostering economic growth, says José Manuel Campa, Chairperson of the European Banking Authority (EBA)

Mr. Campa, EBA, as an independent EU authority, plays a key role in protecting the EU banking sector integrity to support financial stability in the EU. How do you contribute to the achievement of such goals? 

As Chairperson of the EBA, my role is primarily to ensure a robust and resilient banking sector that can best serve citizens while also navigating economic shocks. This goal starts with building and maintaining a strong regulatory framework that helps mitigate risks across the financial system. There is no doubt that this framework is needed, given the multiple crises European banks have had to cope with: from the Global Financial Crisis to the COVID-19 pandemic and now the geopolitical and the recent inflationary pressures, as well as the war in Ukraine. 

Day to day, our work is centered around strengthening banks’ robustness by implementing key regulatory reforms, particularly those stemming from the Basel III framework. The EBA’s role is crucial in setting capital requirements and stress testing banks to ensure banks can endure economic downturns without causing systemic damage. These measures foster trust in the financial system, which is vital not just for banks but for our economies at large.

Aside from regulation, the EBA works to improve supervisory practices across Europe. We aim to create a level playing field, so banks can operate smoothly across borders, thus facilitating the growth of the Single Market.

Over the last few years, we have witnessed high inflation caused by multiple factors – starting from the health crisis, the energy crisis, the war in Ukraine... What is your opinion about the reduction of the policy rates? What is the "health status" of the EU banks, how have they navigated through the protracted crises?

Indeed, these past few years have seen uncertainties test the resilience of many industries – including the banking and, more generally, all financial sectors. However, I am pleased to say that European banks have largely weathered such clouds well. Not only have banks shown that they can withstand various geopolitical pressures, but the banking sector has also played a crucial role in absorbing and mitigating such shocks to our economies.

When it comes to interest rates, we need to recognise that while lower interest rates initially helped mitigate the immediate impact of the Global Financial Crisis this has come with long-term challenges. This low-interest-rate environment has put pressure on banks' net interest margins. 
Regarding inflation, while the European Central Bank has raised rates to combat rising prices, banks have had to adapt to this new environment. Higher rates can actually benefit banks' profitability by improving net interest margins, but they also increase the risk of defaults, particularly among those borrowers exposed to variable rate loans. The key is to find that balance in ensuring that while banks' earnings improve, they remain prudent in their lending practices to safeguard financial stability.

What is your opinion about the banking system in the country, taking into account the global environment? What challenges lie ahead banks in a country like North Macedonia and how can they enhance their contribution to the growth of the country's overall economy?

I was recently in North Macedonia for a conference where I spoke about enhancing banking regulation to maintain financial stability. This should be the best practice. The banking system in North Macedonia faces many of the challenges that we also face in the EU given today's interconnected global financial environment. 

Inflation, as I have mentioned, has been a challenge for us all, and we must all navigate the same pressure that it brings and of course, geopolitical tensions that have impacted on the global economy have not spared any banking system. Other challenges that face not only the financial system, but every key sector is the ongoing fight against climate change and North Macedonia should be preparing for the pitfalls that it may bring.

Faced with such challenges, the banking system at large should be a key player in ensuring growth. In addition, we must all maintain a strong regulatory framework, aligned with international standards. These measures will be pivotal in ensuring that the banking sector remains resilient and capable of supporting sustainable growth.

Will banks "survive" the major technological changes, such as artificial intelligence, and the influx of fintech companies and large technology platforms that take “slice of the cake” that until now has been reserved for the banks? Despite the benefits from new technologies, we are witnessing that they have enormously increased fraud in the financial sector. How can citizens and companies protect themselves from such abuses, and what can banking regulators and authorities do to prevent it?

The rise of new technologies such as AI and the emergence of fintech companies do of course present us with challenges but also with opportunities for the banking sector. Banks will need to innovate and adapt if they are to thrive in this new digital environment. Many banks are already leveraging AI to improve customer service, optimise their operations, and enhance risk management. However, the real challenge lies in competing with fintech companies and large technology platforms that are able to be more adaptable and less held back by legacy systems.

Despite the threat brought by such new entrants, banks have a significant advantage: trust. Customers still view banks as more secure and reliable when it comes to handling their money and savings. This trust is their biggest asset and must be maintained by investing in cybersecurity and protecting against fraud, which, as you mentioned, has increased with the adoption of digital services. 

For regulators, the focus is on ensuring that technological innovations do not compromise the safety and soundness of the financial system. The EBA has been proactive in issuing guidelines on the use of AI and digital technologies in banking, ensuring that banks adopt best practices for governance, risk management, and transparency. Additionally, we are working closely with national regulators to develop frameworks that protect consumers while fostering innovation.

Central banks, including ours, have responded to the recent inflationary episode with monetary tightening and a combination of macroprudential measures to strengthen banking system resilience and to support monetary policy. How do you rate this combination of measures?

The combination of monetary tightening and macroprudential measures is necessary in response to the inflationary pressures we have recently been facing. Central banks across the world, including in the EU, have adopted this dual approach to ensure financial stability. By raising interest rates, central banks are addressing inflation directly, while macroprudential measures, such as increasing capital requirements or stress testing, help ensure that banks remain resilient in the face of economic shocks. 

The EBA, along with the ECB, regularly conduct stress tests – including the upcoming stress tests on climate as part of the European Commission’s Fit-for-55 campaign to ensure the fight against climate change continues. 

Of course, a balance needs to be struck between maintaining price stability and ensuring that the banking sector can properly support our economies. Higher interest rates, while necessary to tackle inflation, also have the potential to put an undue burden on borrowers. 

Macroprudential measures ensure that banks have enough capital to absorb potential losses from non-performing loans and maintain credit flow, which is crucial for economic recovery.

These implemented measures have paid off as we have seen inflation drop below the target of 2% in the EU. Though a positive sign, we must remain prudent. The EBA continues to work closely with central banks and national authorities to assess the impact of these measures and ensure that the banking sector remains both resilient and capable of supporting the broader economy.

How important is the independence and transparency of central banks and regulators for the successful execution of their mandates?

Independence and transparency are the cornerstones of effective central banking and regulatory oversight – without them the financial system would not be able to serve our economies. When central banks are given the necessary powers and tools, they can affect real positive change such as controlling inflation and ensuring financial stability.

Not only must they be independent but, as you say, transparent also to make sure that they are properly accountable, which in turn builds up trust among those who depend on them, governments, citizens, the markets and the wider economy.

It is in good times when this goodwill is built up that it can then be used in times of crisis or economic uncertainty. Transparent communication from central banks and regulators helps manage expectations and can reduce market volatility by providing clarity about future policy directions.

In my view, the independence and transparency of central banks and regulators are not just desirable—they are crucial for achieving financial stability and fostering economic growth.