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ECB Forum tackles hot banking topics of credit, climate and integration risks

16 November 2021

The fourth ECB Forum on Banking Supervision, entitled “Tomorrow’s banking: navigating change”, took place on 9 and 10 November and focused on the challenges facing European banks today and how they can be addressed to maintain a sound banking sector in the future. Speakers covered the timely topics of credit risk and how banks have fared during the pandemic; climate change and how prepared banks and supervisors are for the associated risks; and greater integration of the banking market and whether the banking union will ever be completed.

Opening the conference, the ECB’s President, Christine Lagarde, said that European banking supervision played a crucial role in the crisis response, noting that it was able to ensure that “banks acted as shock absorbers, rather than amplifiers.” Nevertheless, European supervisors need to keep an eye on the build-up of risks, she added.

Picking up on President Lagarde’s remarks, Supervisory Board Chair Andrea Enria stressed that even though the outlook is much brighter now, it is still clouded with uncertainty, and it is the job of supervisors to call for caution. While “profitability has bounced back more than everybody expected”, the withdrawal of public support measures will ultimately reveal how supported debtors have fared, so non-performing loans (NPLs) may increase. When asked about low interest rates, Mr Enria acknowledged that “it has been difficult for banks”. However, the sector is suffering from more structural issues, such as low cost efficiency and low return on equity. “The sector, on average, is burning capital,” he warned. But the pandemic has been a turning point and “banks are moving towards the structural repairs needed rather than just waiting for [higher] interest rates”. Some banks have started to radically change the way they do business and to sustainably restore profitability, and the Chair called on other banks to follow suit: “The highest risk for banks is just standing still.”

In the discussion on credit risk, Supervisory Board member Elizabeth McCaul said that without the Single Supervisory Mechanism, the swift and coordinated response to the crisis would have been impossible. But there’s no time for complacency, she added, “We want to encourage banks to have their houses in order. Good plumbing is essential for a resilient banking sector.”

Whereas Ms McCaul asked for caution, even in spite of the slightly decreasing NPL ratio, Ana Botín, President of the European Banking Federation and Chair of Banco Santander, said she did not expect an increase in NPLs in the coming quarters.

She also seemed to disagree with fellow panellist Nicolas Véron’s opinion that it is “certainly not a good idea” to decrease the capital conservation buffer. He was also in favour of replenishing the countercyclical buffer more quickly than in the past. “Since the financial crisis, European banks have built buffers, on buffers, on buffers,” Ms Botín asserted, an argument also supported by investor David Teitelbaum.

During a lively panel, Mr Véron and Ms Botín also differed on the actions needed in response to climate-related risks. While the former argued for more transparency on green finance in European banking, Ms Botín pushed back, saying that for transparency on green and brown assets to be useful, there needed to be an agreed taxonomy so that the impact and benefits of the different assets could be better compared.

In the panel on climate risk, Vice-Chair of the Supervisory Board Frank Elderson said that “learning curves need to be steep” given the urgency of the climate crisis and the intense work needed to tackle it. And Sonja Gibbs from the Institute of International Finance observed that banks are increasingly embedding climate risk in their business models. She noted that in a recent poll, 90% of chief risk officers surveyed viewed climate risk as the top emerging risk, and 50% believed that it required their urgent attention in the next 12 months.

All panellists agreed that there has been visible change in this area. Isabelle Mateos y Lago of Blackrock even referred to a “sea change” in the financial sector over the past two years, with climate risk increasingly being recognised as an investment risk and a macroeconomic risk. Like Ms Botín, she also acknowledged that banks in the EU and the United Kingdom were further ahead on climate risk because of supervisory efforts.

Beyond climate, the Forum took a close look at other emerging risks, such as digital disruption coming from fintechs. Jean Pierre Mustier, Operating Partner and Sponsor at Pegasus Europe, insisted that the current priority for banks is “to transform”. “There are challenges inside the banking system that only banks themselves can take charge of,” said John Berrigan, Director-General for Financial Stability, Financial Services and Capital Markets Union at the European Commission.

In the panel on deepening banking market integration, speakers agreed that digitalisation can be part of the solution to further consolidate the European banking system, particularly in relation to cross-border activities. European Banking Authority Chair José Manuel Campa stressed that the European Union is ready to take the next step to complete the banking union with the creation of a European deposit insurance scheme. “People are focusing on the costs of moving forward and not at all on the costs of not moving forward,” said Mr Berrigan. Earlier, Mr Enria had said that even if negotiations aren’t unlocked, “we need to do our best to make the banking union work within the current setting.” The supervision and resolution legs are up and running, and the legislation already has mechanisms that could allow banks to move across borders, he argued. “Don’t wait for something to happen that resolves all the problems. Sometimes the best is the enemy of good.”

The European Commission remains strongly committed to completing the banking union, despite the difficult negotiations and the somewhat eroded sense of urgency. EU Commissioner Mairead McGuinness summed up the stop-start progress in her keynote address: “Frankly, we need the banking union more now than ever because of the rapid change in the entire banking system and the financial world. So while it’s difficult, we’re determined to achieve it.”

Watch the discussions

Europejski Bank Centralny

Dyrekcja Generalna ds. Komunikacji

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