"The banking sector has enhanced capital, liquidity, and profitability"
Mr. Monzon, what are the most noteworthy results of the EBA transparency exercise?
We publish over 10,000 data points per bank, totaling over 1.2 million data points for 123 EU/EEA banks. No other institution offers such a level of transparency and detail. Along with the transparency exercise, we release the Risk Assessment Report, highlighting risks and vulnerabilities in the sector. The results illustrate that the banking sector is resilient with high capital and liquidity ratios and a good level of profitability.
What lessons have you drawn from the report?
We have drawn many lessons. The banking sector has improved capital, liquidity, and profitability over time, making it well-prepared for the future. This is crucial given the uncertain macroeconomic environment and increased geopolitical risks. Although NPL ratios are currently low, the report points to some indicators suggesting a, albeit modest, deterioration in asset quality.
What other insights have you gained?
Another insight is the resilience of the EU/EEA banking sector following the banking turmoil in March. There are signs that unrealized losses from banks' bond holdings remain limited on average, even though smaller banks are generally more affected than their larger counterparts. Even after the March turmoil, we did not experience significant deposit outflows, which is also a positive sign.
Angel Monzon, EBASo far, banks have managed to limit the impact of interest rate risk.
Where will you, as a banking regulatory authority, be scrutinizing more closely, and – if necessary – be tightening regulations?
Following the events in March, liquidity and interest rate risk are certainly in focus. These are topics discussed within the EBA and also in Basel. So far, banks have managed to limit the impact of interest rate risk. ESG-related risks are something banks are dealing with, and regulation will also contribute to appropriately considering risks in this area. What we learned from the March events is that the resolution capability of credit institutes should have priority in the future.
Can you specify that?
We need to ensure that a bank's optimal resolution plan can function in practice. Regarding regulatory issues and deposits, close monitoring of deposit flows and their composition is justified. It's essential for banks and regulatory authorities to further explore their liquidity monitoring methods with a more forward-looking perspective, such as monitoring interactions on social media.
The profitability of European banks has increased. This is primarily due to the significant growth in interest income after the interest rate turnaround, but also due to the continued manageable level of risk provisions. How will the profitability develop?
That is the question everyone is asking. We observed a slowdown in the expansion of net interest margin – the key driver for net interest income and profitability – over the last few quarters. We expect this trend to continue. One reason is that banks increasingly resort to market funding, which is more expensive than deposits. Furthermore, the rise in deposit costs has been subdued so far, but it is questionable whether banks will be able to keep deposit costs low. Alongside the uncertain outlook for profit margins, there are uncertainties about credit growth, as it is quite likely that it will not support net interest income in the future.
You mentioned non-performing loans. Do you expect an increase and corresponding higher provisions for credit losses?
The NPL ratio has recently tended to decrease since the introduction of regulatory reporting data. This has also been supported by low unemployment despite a deteriorating economic situation. Nonetheless, this trend has stalled in recent quarters. There are initial signs of a deterioration in asset quality, such as an increase in the volume of NPLs.
Although this can be considered a small change, we need to see how things will develop in the future and whether we are at a turning point. If this is the case, provisions are likely to increase. Overlays could help mitigate these impacts – but they will not prevent the rise in provisions for credit losses.
What are the biggest threats to banks and financial stability?
We can name three main risks: One of the most significant threats – probably to the entire world and society – is undoubtedly geopolitical risks. They lead to significant uncertainty regarding macroeconomic conditions. The global presence of EU/EEA banks makes them particularly vulnerable. Another important risk is cybersecurity threats. And finally, following the events in the US in March and the downfall of Credit Suisse, one aspect has become very important: bank deposits and their rapid movement in the age of technology.
Angel Monzon, EBABanks must be prepared for potential shocks, including possible impacts of major cyberattacks.
What do you think needs to be done now?
Banks and regulatory authorities should remain vigilant and flexible so they can quickly respond to changing monetary and economic conditions as well as geopolitical developments. Banks must be prepared for potential shocks, including possible impacts of major cyberattacks. Given the potential deterioration in asset quality, it is still important for them to promptly identify delinquent borrowers and loans.
However, the potential deterioration in asset quality should not deter banks from lending to the economy: They should ensure that the economy is supplied with loans even in such times, and at the same time, assess and price risks appropriately when providing new financing. A healthy funding mix is as important for banks as prudent management of interest rate risk. Finally, banks are expected to continue their efforts to develop approaches to managing ESG risks to integrate forward-looking information.
