Interview with Dagens Industri
Interview with Kerstin af Jochnick, Member of the Supervisory Board of the ECB, conducted by Robert Triches
20 May 2022
What are your thoughts on the war in Ukraine?
It’s dreadful. You feel so much for the population and the country, which has just gone through a democratisation process and was planning to apply for EU membership. It’s very sad and will take a long time to repair. As a supervisory authority, we must of course as a next step consider how it will affect both ourselves and the banks. We have a number of banks which either have some exposure to Russia or subsidiaries in Russia, or vice versa.
Generally speaking, how serious is the war for European banks?
We don’t believe that the current exposure to Russia could affect them to any great extent. We’re more concerned about the indirect effects. It’s all about how long the war will last and how great the effects will be on the real economy and inflation.
We initially had a meeting every evening to follow up on developments; these meetings now take place a few times a week. We are monitoring the markets closely to see how the stock, currency and bond markets are reacting in order to understand how they view the developments. We are of course also closely monitoring banks which have exposure to Russia, and are in daily contact with them to find out what they’re thinking and to decide whether we need to implement any measures.
What consequences are you most concerned about?
We must consider a range of scenarios and look at the situation from different angles, but when we look at the banks, our priority right now is credit risks and cyber security risks. How are the banks’ borrowers faring in this situation? The picture varies, but some of the banks’ customers are, for example, dependent on the energy market and therefore greatly affected by the steep rise in prices.
Before the war, you were focusing on the banks' climate work. What’s the status now?
It’s important that this work is not abandoned, because climate issues are just as important, even with a war going on. We are performing a stress test of the banks this year to see how far they’ve progressed in their climate work and how well they’re fulfilling their commitments.
The effects of the climate crisis might not be visible in our everyday lives in the same way as the war, but they will be if we don’t do anything.
How are the banks affected by rising inflation?
It’s clear that general economic developments and inflation are important for our banks. If the economy does well, the banks often benefit too.
Yet, if interest rates rise, as most forecasts predict they will, it will probably be positive for the banks, provided there is growth. They have, after all, had relatively low net interest income during the low interest rate period. On the other hand, higher interest rates and higher inflation would hit the banks’ borrowers, depending on the sector they operate in. So, there are many different aspects to balance. However, from a supervisory perspective, there will of course be a strong focus on the exposure of each individual bank.
Are there any countries or regions which are particularly exposed to the risks?
Overall, the European banking sector appears to be strong and has coped well with the COVID-19 crisis. Capital and liquidity levels are stable. The banking system is robust enough to handle fairly substantial disruption.
What are your responsibilities as regards monitoring the European Commission’s sanctions?
We are closely monitoring the situation and, for our part, it’s about ensuring that the banks have a good risk management function in place which covers this and that they are equipped to comply with the rules and sanctions in place. However, many banks are complaining that it’s not easy to comply with the sanctions. The situation becomes complex when many different parties are involved.
What is your view of financial stability in Sweden at present?
The high level of household indebtedness and the link to the housing market, coupled with the fact that all financing lies within the banking sector still represents a vulnerability; the problem is still there.
Swedish banks are of course stable in that they are well capitalised and their liquidity is good. However, at present, we are all having to live with the unease and uncertainty surrounding the war in Ukraine, particularly as regards the real economy. The vulnerabilities we see today are the same as those we saw when I was there: household indebtedness and the corporate bond market. There is also unease about the commercial property market with its high borrowing levels, and there is some uncertainty in assessing the risks in the current situation.
[This is a shortened version of the full interview transcript and excludes answers that are not related to banking supervision or financial stability.]