Interview with Børsen
Interview with Kerstin af Jochnick, Member of the Supervisory Board of the ECB, conducted by David Bentow on 25 August 2022
13 September 2022
How would you assess the current financial stability of eurozone banks?
In terms of financial stability, our assessment is that euro area banks are resilient and have recovered from the global financial crisis of 2008. We consider that banks are well positioned in terms of the necessary liquidity and capital, and we also see that they have made efforts to reduce stocks of non-performing loans, which are now below 2% of total loans.
What do you see as the main risk for banks in Europe at the moment?
Overall, our assessment is that banks are able to manage those risks we have identified. Having said that, there is considerable uncertainty. The invasion of Ukraine is clearly having a negative impact on the global economy. This is a matter of concern, and something that the banks will have to monitor very closely.
What area are you focusing on, as supervisory authority for the 110 largest banks in the eurozone?
We constantly challenge banks on how well they actually understand and measure their risks. Clearly, credit risk was a focal point for us during the pandemic, and we specifically looked into how the pandemic could directly affect certain economic sectors, for example services like tourism. We still believe credit risk merits close attention, but we are now also focusing on highly energy-intensive sectors, and sectors that are particularly sensitive to rising interest rates.
What is your focus when talking to the banks under your supervision?
We challenge banks to ensure that they have a sufficient overview, and understanding, of all their risks. This applies to credit risk, of course, but also to other risk areas. Cyber risk is, for example, considered to be more serious today than ever before. Banks also need to improve their management of climate risk.
Both you and other supervisory authorities feared large credit losses when the coronavirus (COVID-19) pandemic hit. Yet that didn’t happen.
There was a major coordinated effort from governments and authorities in response to COVID-19, largely concerned with ensuring that banks were in a position to continue supporting the economy. We believe these efforts enabled banks to fulfil their role and responsibilities in that situation.
Now, of course, we have seen significant interest rate increases in 2022. What will this mean for the banks?
We must acknowledge that the outlook for the wider economy is not overly positive, partly because of the war in Ukraine, but also because of the normalisation of monetary policy around the world. Generally speaking, experience shows that when interest rates rise, banks can increase their interest income. However, this is on the condition that the real economy does well at the same time, as a decline in economic activity often leads to losses on banks’ lending.
So, even working on the assumption that higher interest rates are positive for banks, it is too early to say what the overall effect will be.
Overall, what do you consider to be the biggest challenge for banks?
Generally speaking, euro area banks are in a good position, but they still have some structural problems. This is something we have pointed out for a long time, but more needs to be done.
A major issue is that banks are not profitable enough. There can be many different reasons for this, such as overbanking in some areas, a large number of branches, and some banks failing to become sufficiently digital. Yet it is also clear that some banks no longer have sustainable business models.
There are differences across Europe, however. You can see, for example, that the Nordic banks are more profitable and generally perform better than banks in the euro area. This is because, in addition to being more cost-efficient, they have been better at introducing new digital services to customers and offering appealing products that customers want to use and are willing to pay for.
But there is no doubt that there are a number of banks that will have to review their current business models, including by adopting new digital technologies, but also in response to other challenges, such as how they will manage climate risks. This last area could become very expensive if not handled effectively. Those banks that prepare earlier for the transition to net zero will benefit from a competitive advantage.
Banking industry organisations have long complained that they believe regulation has become too complex and expensive to comply with, and banks face increasing interference from you, the supervisory authorities. How do you respond to such criticism?
Banks play a very important role in our society. We therefore need demanding requirements – both for banks and their boards – to ensure a safe and sound financial system.
Being a bank does entail certain costs. And running a bank properly is no easy task. It requires skilled employees and the right tools to understand the risks faced.
Therefore, we will be getting even more demanding in terms of in terms of what we expect from banks and their management bodies. This is because their activities are highly complex and continue to increase in complexity.
Your supervision forms part of the EU’s banking union, which also includes a common resolution authority and is supposed to include a common deposit insurance scheme as well. Yet, although you have been engaged in supervision since 2014, there is still no common deposit guarantee. So do we even have a banking union?
We do have a banking union. The supervisory pillar is working – it was even crisis-tested during the COVID-19 pandemic and was proven to work well. We also have an effective common resolution authority.
To be honest though, we are disappointed that a common deposit insurance scheme has not been implemented. That would increase confidence in banks and in the banking union. And we believe it needs to be put in place. It is not good enough that, after ten years, we still have not found a model everyone can agree on.
Another reason for the banking union was to facilitate cross-border mergers within the eurozone. Yet we have not really seen any examples of that.
From our perspective, we would welcome more mergers and cross-border activities as this would deepen the integration of the EU banking market, which should be consistent with a more efficient and profitable sector overall. Having said that, our role is not to push banks to carry out more cross-border mergers but rather to make sure that the supervisory framework is not hindering those sorts of activities. In a similar vein, we have also been underlining the importance of improving the cross-border integration of banking groups which are already operating in the banking union to bolster their ability to deploy their resources flexibly and efficiently in response to shocks, and thereby reduce the risk to financial stability. We have undertaken some initiatives in this domain, but there are limits to what we can do within the current legislative framework.
You yourself come from the Nordic region, where there is a long history of considerable openness. Do you think that you are open enough to the public in relation to your supervision and the individual banks?
Countries such as Denmark and Sweden have a long tradition of openness and transparency, while other countries have different traditions.
I think we should always strive to be as transparent as possible. ECB Banking Supervision remains accountable to the EU institutions, including the Parliament, Council, and Commission, in a variety of ways. A lot of the information stemming from this, such as our hearings and exchanges of views in the Parliament, our answers to written questions by MEPs and our annual reports, are available to the public. In addition, we publish a great deal of information on our website. The results of the
EU-wide stress test are public, including for individual banks. We also publish the aggregate results of our Supervisory Review and Evaluation Process (SREP). As for our individual Pillar 2 capital requirements we impose on each bank, we sought permission from banks to publish these figures. So this is an area where we have actually increased transparency.