02 October 2023

SSM's McCaul: Interview with Cinco Días

We are currently in a high interest rate environment which is boosting banks’ profits, although banks are facing more customer defaults. Is the ECB worried about another rise in non-performing loans?

We have been signalling to banks for quite some time that we are living in uncertain times. We have emphasised the need for them to remain vigilant and keep a close eye on their loan portfolios. We have asked them to review their provisioning levels with an eye to making sure they have a clear line of sight into potential deterioration in their portfolios. The time is now for banks to be investing in their credit risk management processes and in ensuring those governance processes are as robust as they can be.

Which credit segments are showing the greatest signs of deterioration?

So far we are not seeing signs of deterioration but in an economic environment like this one, with rising interest rates and geopolitical uncertainty, we are asking banks to implement robust credit risk management processes for all their portfolios. We have put particular emphasis on the mortgage and small and medium-sized enterprise portfolios, as well as commercial real estate. We are taking a cautionary stance and asking banks to have early warning indicators in place. This is important because it will enable them to get ahead of any difficult situations.

Are you concerned about the growth of non-bank financial institutions?

This is an area we are focusing on because this type of financing has been growing in Europe over the past ten years, as has its role in the global economy. Non-bank financial institutions (NBFIs) are not subject to banking regulation and it’s an area that is less visible to supervisors, so there are risks that are not monitored as closely. We are paying attention to this sector to gain a clearer understanding of it. Lending by this sector is one area of concern, since we don’t know which exposures on their books may correlate to those on banks’ balance sheets. There could therefore be a bigger risk concentrated in one specific sector or with some specific clients. We also need to better understand the interconnectedness between NBFIs and banks, as this can be a source of risk.

At the beginning of the year in the United States, a crisis affected some medium-sized banks that did not have enough liquidity to operate. Banks in Europe managed to avoid this crisis. Does this mean that the supervision of European banks is better than that of US banks?

We have learned several lessons from the turbulence in the US market, but there are very important differences between those examples in the United States and in Europe. I don’t think we have an institution in Europe that has a business model that resembles that of Silicon Valley Bank (SVB)...

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