05 December 2019

EURACTIV: EU banking regulator: ‘No green economy if we encourage banks to be insolvent’

Europe wants to use all the tools available to transit toward a ‘green’ economy. But ‘green’ lending should not be incentivised by easing capital requirements for banks, the European Banking Authority chief, Jose Manuel Campa, said in an interview.

The EBA has recently published the results of the transparency exercise, including data from EU banks. One of the main conclusions is that the profitability of European banks is low. How worried are you, given the current slowdown of the economy?

We highlight that profitability is a concern for us. Banks have enhanced the capital ratios over the last few years, and they decreased the non-performing loans (‘bad’ loans) ratios. That is really good. That means that balance sheets have been strengthened. But at the same time, the profitability has been low for a number of years. And the average profitability is below the estimated costs of equity. That is a challenge because the macroeconomic environment is challenging. Banks need to find ways to enhance profitability.

What could they do?

We highlighted in the report two dimensions. Firstly, the operating costs of the bank are an important aspect. Cost-to-income ratios have remained stable over the last three or four years. In fact, they picked up in the last year a little bit, but just marginally. Secondly, we highlighted that banks need to invest in digitalization and the transformation of their business models, in some of the new aspects that technology brings to the industry. Banks really have to try to be more effective in decision profitability.

Vice-president for financial services, Valdis Dombrovskis, recently said that regulation could favour ‘green’ investment and loans, while keeping prudential considerations in mind. The EBA is assessing the possibility of reviewing the capital requirements for banks to support ‘green’ lending, as a green-supporting factor. Do you think this is a good idea?

Banks have to make a better assessment, risk assessment of the climate-related activities, not just the green, but also the ‘brown’, ones, meaning those that are not conducive to the sustainable transition. Then we need to have adequate capital for those risks. At this stage now, and I think that’s what Dombrovkis was signalling as well, it is too early to really talk about specific support factors until we have really an adequate way of talking about what is green or not, i.e the taxonomy. Secondly, we need to know how risky it is to be ‘green’ or not, from the point of view of lending by banks to those activities, so we make sure that there is an adequate provision of capital to that lending.

But do you think banks should have beneficial regulatory treatment when they are lending to ‘sustainable’ activities?

We need to have banks that are capable of helping that transition toward the green economy. That’s absolutely true. But to do that, the most important thing is that we have solvent and profitable banks. If lending to that ‘green’ part of the economy is of a certain risk, banks need adequate capital provisions for those risks. And the analysis has to be evidence-based. I cannot tell you ex-ante capital provisions of those activities until I have an adequate risk assessment. To sum up: first is disclosure to understand what we are talking about; secondly we need an adequate measure of the risks; only then we can talk about the allocation of capital. We’re not going to get to a green economy if in the process we end up encouraging banks to be insolvent, and get into another financial crisis.

Full article on EURACTIV

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