Europe needs to make use of all out there instruments to maneuver in the direction of a green economy. As a result of the battle towards international warming is likely one of the most distinguished priorities of the brand new European Fee. Nevertheless, the president of the European Banking Authority (EBA, for its acronym in English), José Manuel Campa, launches a warning to face towards incentivizing the green economy by stress-free the capital necessities for banks once they lend to sustainable sectors, because the European Union (EU) is contemplating. In an interview with the EconomistCampa additionally warns that, regardless of the consolidation effort of Spanish banks, it nonetheless wants to enhance its working prices and discover viable fashions for the longer term.
Not too long ago, the EBA printed the outcomes of the transparency train, after amassing knowledge from EU banks. One of many essential conclusions is that the profitability of European banks stays low. Are you fearful, given the present financial slowdown?
Profitability is a priority for us. Banks have improved their capital ratios in recent times and have decreased the quantity of delinquent loans. That’s actually good, it implies that the steadiness sheets have strengthened. However, on the identical time, profitability stays low for a number of years. It’s under the estimated capital prices. This represents a problem, as a result of the macroeconomic setting is demanding. Banks must discover a method to enhance profitability.
What might they do?
Banking working prices are an vital first facet. The price-to-income ratio has remained secure within the final three or 4 years. Actually, they’ve elevated barely within the final yr. Second, banks should put money into the digitalization and transformation of their enterprise fashions, in a number of the new features that expertise brings to the business. Banks actually must attempt to be more practical when deciding on their profitability.
Concerning Latin American markets, a number of the dangers are already clearly materialized, given the downward revision of progress prospects
The conclusions of the transparency train warned concerning the threat of publicity to rising markets. To what extent was a warning to Spanish banks? Are they extra susceptible, given their presence in nations like Mexico, Brazil, Turkey?
He’s actually speaking about two banks, as a result of these are the one ones that may have that sort of publicity. These (banks) have confirmed their robustness and diversification over time. Nevertheless it was a common warning, not just for the Latin American facet of the Western Hemisphere of rising markets. As we transfer ahead, there may be the potential for a lower in progress in high-growth markets or rising markets equivalent to Asians. Concerning Latin American markets, I might in all probability say that a number of the dangers are already clearly materialized, given the downward revision of progress prospects. However it’s extra for the opposite geographical areas, since we observe a macroeconomic context with downward dangers because of the business pressure between China and the USA.
Given this international instability and commerce conflict, and on the identical time, the low profitability of banking, how do you see Spanish banks in comparison with their European friends?
Our common analysis on EU banking additionally applies to Spanish banks. The problem of profitability is current, there may be no doubt about it. Spanish banks present a decrease cost-revenue ratio than different friends within the sector, however the common profitability is identical because the EU common. The market setting for them isn’t so completely different than for the remainder of the EU: the setting of low rates of interest and low progress in mortgage volumes. That could be a nice problem for all of them.
“We have to know the way dangerous an exercise is, whether or not green or not, from the standpoint of financial institution loans”
What are the suggestions for Spanish banks?
The recipe is kind of just like the remainder of the European banks. They should work on their value buildings, to make sure that they will have profitability and current viable enterprise fashions. It’s true that Spanish banks have undergone many extra restructuring when it comes to mergers and consolidation than different elements of the business, however the challenges in that regard stay the identical: low profitability, improved working prices and viable enterprise fashions for the longer term .
The vice chairman for monetary companies, Valdis Dombrovskis, lately indicated that the regulation might favor funding and 'green loans', taking into consideration prudential issues. The EBA is analyzing the opportunity of this “green assist issue” to loosen up capital necessities to banks. Do you assume it's a good suggestion?
We have to have satisfactory capital for the assessed dangers. At the moment, and I feel that’s what Dombrovkis was additionally mentioning, it’s too early to actually discuss particular assist elements, till we have an satisfactory option to discuss what’s green or not, that’s, the taxonomy during which the European Union is working. Secondly, we must know the way dangerous an exercise is, whether or not green or not, from the standpoint of financial institution loans to these actions, to make sure that they’ve satisfactory capital provisions.
“For buyers, belief isn’t solely present profitability, but in addition long-term sustainable profitability”
However, is it in favor of the financial institution loans to sectors that favor the ecological transition have a useful regulatory remedy?
We’d like banks which can be able to serving to that transition to the green economy. That’s completely true. However to do this, an important factor is to have a solvent financial institution and worthwhile banks. If loans to those ecological sectors current a sure threat, banks will need to have satisfactory provisions for these dangers. That’s the vital factor. The evaluation has to be primarily based on proof. We can’t determine ex ante capital provisions for these actions till an satisfactory threat evaluation is made. First is to grasp what we are speaking about, what’s green. Second, it’s an applicable measure of the dangers, after which we can discuss concerning the allocation of capital. We will not attain a green economy if alongside the way in which we encourage banks to be insolvent, to enter into one other monetary disaster.
In a latest speech, he mentioned that European banks haven’t but been capable of absolutely get better investor confidence. What’s the cause?
Profitability is the obvious indicator. For buyers, belief isn’t solely present profitability, but in addition long-term sustainable profitability. I suppose that the decrease valuation by the market signifies that they’re involved that banks could current viable and worthwhile enterprise fashions and, on the identical time, an satisfactory charge of return.
“It will not be operative to have a European authority and not using a change within the present regulation”
Cash laundering is likely one of the most vital challenges within the EU within the monetary sector. EU finance ministers will talk about this concern this Friday. Some companions suggest a European company, however you’ve gotten mentioned that you need to first make progress in harmonizing the requirements. What might be the midpoint?
There’s a clear feeling that our present strategy to cash laundering inside the EU isn’t applicable and may be developed. The directives we have are primarily based on rules and usually are not prescriptive sufficient. They offer numerous house for the variation of the regulation by the nationwide authorities. The result’s that native regulation could be very various within the European Union. As a consequence, the power to manage transactions that might contain cash laundering is troublesome as a result of there may be numerous variety. And as soon as cash enters the only market, it could actually transfer simply. We’re as sturdy as our weakest hyperlink. As well as, the variety of regulation makes it troublesome for banks current in numerous elements of the EU to be environment friendly in coping with cash laundering.
And returning to the difficulty of single authority …
In all probability, it is usually getting into the correct path. However you have to have a transparent mandate and assets. It’s troublesome to have a mandate if the regulation below which it’s working could be very various within the EU. I feel we must progress in each instructions. It will in all probability not be operational to have a European authority and not using a change in present regulation.
“If two dangerous banks don’t current a sustainable enterprise mannequin, consolidation will not be the answer”
May EBA take the reins, as some companions need, together with Spain?
Since January 1 we have already assumed some powers within the subject of the battle towards cash laundering. We’re doing a little revisions of the appliance of the directives. As well as, we have some expertise and databases. It actually relies on what sort of mandate that authority would receive. If we are contemplating an incredible capillarity, with specialists and workers deployed all through the EU, with direct obligations on the bottom, then it might in all probability be a very completely different physique, which might require many assets. If we attempt to make sure at European degree that there’s convergence in supervision by nationwide authorities, we might actually be far more helpful.
One of many fixed requests out of your establishment and the ECB is the necessity for European banks to consolidate extra, through mergers or purchases. Through which nations or areas do you see extra space for it?
It isn’t about specializing in a selected area. We outline consolidation in a barely broader method, in what I name constructive dynamics. Which means that banks that aren’t actually working, or do not need viable enterprise fashions have to go away the market. Consolidation is sweet if it results in a greater financial institution on account of consolidation, by enhancing effectivity and profiting from economies of scale. However if two dangerous banks don’t current a sustainable enterprise mannequin, consolidation will not be the answer to the profitability problem. The merger mission should be extra sustainable and extra viable than the 2 establishments' tasks individually.
And what function do viable banks play on this framework of constructive dynamics of which he speaks?
We additionally must have a extra dynamic exercise when it comes to actually good banks. In Europe we don’t see that banks with good efficiency are gaining market share, or rising, or enhancing their cross-border exercise. For us, an efficient single market with cross-border exercise is vital. Due to this fact, we usually are not focusing solely on consolidation in a single market, however on this concept of optimistic dynamics. There ought to be extra retailers for dangerous banks, whereas good banks ought to develop. Consolidation ought to happen when the results of such a course of is a enterprise mannequin that’s extra sustainable and viable. If this isn’t the case, we mustn’t welcome consolidation by consolidating.