22 May 2023

Expansion interview with Anneli Tuominen, Member of the Supervisory Board of the ECB

Is the banking turmoil something specific to the United States?

The business models of the banks concerned are very specific and different from those of the banks here in Europe. They had a very specific depositor base, which was concentrated in the technology sector. And they invested heavily in government bonds, which, although not exposed to credit risk, had considerable interest rate risk. This isn’t happening in Europe, where the depositor base is more diversified. Data from the International Monetary Fund show that if debt securities held at amortised cost were to be assessed at market value, the impact on capital would be less than 50 basis points. It would be more than 250 basis points for US banks, so there’s a big difference.

What do you think went wrong at the banks where the authorities had to intervene?

There was a governance problem. That was the main issue in my view. The board should have oversight and focus on the risk outlook in its decision-making. But it’s also a case of ineffective regulation, as smaller banks weren’t subject to the same requirements as larger ones, for instance for liquidity. A recent report by the Federal Reserve acknowledges that supervisors didn’t see the bank’s vulnerabilities in time and, when they did see them, they didn’t react quickly enough to address them.

If the situation deteriorates further, could it lead to contagion in Europe?

As banking supervisors, we know that you can never say never. But our banking sector is resilient in terms of both capital and liquidity.

So you’re not worried?

The European banking system is strong. But, as supervisors, we of course need to keep a close eye on the situation. It’s important to monitor the quality of the assets on banks’ balance sheets, as they can be affected by interest rate hikes. We actually started looking into this in the second half of 2021 when the first signs of inflationary pressure emerged. The recent market developments also show that even more attention should be paid to the liquidity and funding risk outlook, and as supervisors we are doing this already. For instance, one of the four elements of our annual Supervisory Review and Evaluation Process (SREP) focuses on risks to liquidity. We have also already highlighted the need for banks to develop, execute and adjust sound and reliable liquidity and funding plans in the context of our supervisory priorities for the next three years. And, together with the European Banking Authority, we have launched an additional data collection exercise as part of the 2023 stress test. The aim is to assess unrealised gains and losses on banks’ balance sheets and related hedges. Although non-performing loans (NPLs) in the sector remain low for the time being, that can change and the banks need to have adequate provisioning.

What are the biggest risks facing the banking sector?

The macroeconomic situation is still quite uncertain and credit risks may arise. Moreover, in an environment of rising interest rates, there is always a risk associated with these rate hikes. In the euro area banking sector we haven’t seen a situation like the one we recently saw in the United States, but we need to remain vigilant. Against this backdrop, it’s more important than ever that banks continue to improve their internal governance. And they should also be paying attention to new areas like cybersecurity and climate risk.

You mentioned governance. What’s your assessment of governance in Spanish banks?

There are banks with stronger and weaker governance in every country, so we can’t generalise. But, if we look at the results of the SREP, a lot can be improved. I know that lots of bankers are not very satisfied with our approach and think we are too demanding. But it’s a good thing that we are demanding about the quality of a bank’s internal governance. There’s room for improvement....

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