16 February 2022

Interview with Ana Botín, President of the EBF and Chair of Santander Group:“The banks are not complacent”

European banks have weathered the pandemic storm quite well. There have been no significant signs of a deterioration in asset quality so far, although this is in large part due to the stimulus and government support measures.

Where do you see the biggest risks to the banking sector after the pandemic?

The European banking system has been able to withstand the severe economic shock caused by the coronavirus (COVID-19) pandemic thanks to the coordinated reaction by banks, policymakers and authorities.

At the outbreak of the pandemic in March 2020, the European Banking Federation (EBF) put forward a series of proposals, many of which were taken on board. These included implementing a moratoria programme across Europe, extending the time and scope of targeted longer-term refinancing operation (TLTRO) facilities – covering a wider range of counterparties including small and medium-sized enterprises (SMEs) – and revising some elements of the regulatory framework.

However, all of that would have been insufficient had the banking system not substantially recapitalised itself over the previous decade. At the start of this crisis our banking system had a capital ratio of 15% on average and a short-term liquidity ratio of over 150%. To put that in perspective, the level of capital and liquidity now is more than double what it was at the time of the previous crisis. And we have seen the difference: in 2008 banks were part of the problem. In 2020 banks were part of the solution.

As economies begin to recover from the health crisis, the four big risks in the coming years will be credit risk, digitalisation, cyber crime and climate change.

Starting with credit risk, I agree with the ECB’s view that credit risk needs to be managed proactively, and I believe the key to avoiding an excessive build-up of non-performing loans (NPLs) is for banks to identify distressed debtors in a timely manner. This has been happening: at the end of 2020 banks in the euro area had more than doubled their provisioning levels compared with 2019, mainly through the use of overlays.

As you mentioned, there have not been signs of a significant deterioration in asset quality. Not only has the NPL ratio not increased, it has continued to decline to the lowest level seen in the last decade, standing at 2.3%. The question now is to what extent a deterioration of portfolios has been prevented by moratoria and government support. That’s why banks are not complacent. We are analysing the affected portfolios, client by client. It is crucial to identify the viable borrowers in order to help them recover and get back to business-as-usual. Meanwhile, banks need to have responsible collection, recovery and restructuring capabilities in place so they can act decisively once distress signs appear in their portfolios, in order to maximise value recovery.

The second big challenge is the need for rapid action to ensure that banks are competing with tech companies on a fair and level playing field. Competition is to be welcomed: it spurs innovation, benefits customers and drives progress. But it must be fair competition, particularly on issues such as payments and access to data. I am delighted that the EU is taking action on this, and it cannot come soon enough.

One specific risk created by the tech revolution is obviously the potential for cyber crime. Here, the best way forward for the European banking industry is to foster cooperation between banks, regulators and supervisors in order to establish a coordinated and robust framework.

Last but not least, I would flag climate change as both a challenge and an opportunity. We welcome the ECB’s work – such as its Guide on climate-related and environmental risks – but there are numerous issues that need to be addressed. We believe that the supervisory framework still needs more consistency in terms of definitions and data. There are also issues related to agreeing on a common approach to methodologies, scenarios and the timelines. And there are practical steps – like adapting our internal IT systems – which take time to implement.

Banks, regulators and supervisors must work together to overcome these issues. More transparency and coherence in green financial regulation will help instil more confidence among investors, mobilising more capital to fund the transition. And that brings me to a key point. The transition is dependent on sustainable economic growth. So financial regulation must pass a simple test: does it help our customers’ transition and support green growth?

The European crisis management framework has changed considerably since the global financial crisis. Is “too big to fail” a concept of the past?

We have to turn the page on “too big to fail”. What went wrong in managing the great financial crisis wasn’t that some banks were too big to fail, it was that we had no roadmap for how to manage a bank failure – big, medium or small. At that time, there was no protocol for bank recovery and resolution, and improvisation is never helpful when it comes to resolving a bank.

We now have a European crisis management framework that can guide a failing bank through intervention, recovery and eventually resolution, regardless of its size. Also, there is no match for experience, and the European system now has that. In fact, Santander was the first banking group to engage in the resolution of a bank, Banco Popular, within the current framework. Banks have made great efforts to build up the new buffer for loss absorption – the minimum requirement for own funds and eligible liabilities (MREL) – and have assumed the associated costs, in order to remove any obstacle that would impede resolution and to ensure operational continuity in a resolution scenario.

That is not to say that there is not more to do. There are opportunities to refine the system. I think the way in which MREL instruments developed by subsidiaries can end up being deducted from parent entities does not make sense. We also need to find a pragmatic way to set total loss-absorbing capacity development targets for subsidiaries in emerging countries that reflects the longer implementation time frames established in the approaches of the Financial Stability Board (FSB) and the Bank for International Settlements...

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