13 September 2022

SSM:Borsen Interview with Kerstin af Jochnick, Member of the Supervisory Board of the ECB, conducted by David Bentow

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...

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