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What will be the likely net effect of the implementation of the remaining Basel III rules, regarding the output floor and other key areas, on overall capital levels?
We really think this effect is manageable for banks. There was a delay of one year which we thought was fully warranted by the coronavirus (COVID-19) crisis. Now, it's also warranted that we begin the transposition process at European level. Some banks will be more affected than others, but that's what happens with any regulatory review and there will be a long transition period. And globally, the effect is perfectly manageable even with banks’ actual levels of profitability. With the current rate of retained profits, no one will need to raise extra capital.
You have spoken of “search for yield behaviour” in financial markets. While you called for bank governance to take action, could banking supervisors step in, and, if so, how?
Using our normal tools. That is, when we think that some risks are not captured by the practices that are developing in the banks, we can act through our supervisory instruments. These can be either qualitative – saying, for instance, reinforce your risk management procedures – or quantitative in some cases in which we can also have some capital add-ons where we see that this is necessary because the risks are not captured enough by the solvency ratio. So it’s business as usual in a situation where we have to be able to tackle what is, I believe, too much risk taking because banks are looking for yield, be it on traditional credit risk or on market finance, such as leveraged finance.
There have been moves to introduce an element of climate risk assessment into Pillar 2 requirements and stress tests. Given the difficulties of modelling the effects of climate change, what are the dangers and opportunities here?
The danger would be to get stuck in the present situation, where the vast majority of the surveyed banks say climate risk is very important to them, but most of those also say, “We don't have the tools to measure it”. Well, that's a situation that cannot continue. Our supervisory stress test on climate risk, which will take place in 2022, is a very important milestone, because it will push the banks to elaborate on the data they have. We are very conscious that banks’ data are patchy, but it's much better than just to remain without any kind of quantitative guidance. We are absolutely conscious that this is a journey that we are just starting and that there are difficulties. But that's why it's urgent that we get started.
Does banks’ responsibility begin and end with managing their own risk to climate change, or is there a role for banks to play in addressing climate change itself?
Certainly, banks are a part of society and they are part of global society movements. We are banking supervisors; our job is to see that banks manage climate risk for themselves. Of course this will in turn help banks finance the transition to a greener economy.
But that climate stress test exercise won't have an impact on capital requirements, and individual banks’ results won't be published?
Not at this stage, and we don't expect this stress test to have a direct link with the capital requirements. The objective is that we will make progress in this area. Later on, we will use stress tests for increasing the capabilities of the bank and also calibrating the capital needed for stress situations. But this time there will be no capital buffer defined as a result of the climate stress test.
So you would expect individual banks’ results to be published, but it's just too early….
Next year we won’t publish any individual results of the climate stress test, that's absolutely clear. At a later point, we really aim to incorporate climate risk into the ordinary stress test methodology, and then, of course, the results will be published.
Your colleague Mr Enria has called recently for banks to stop waiting for the implementation of the European deposit insurance scheme (EDIS) and to open branches in other euro area countries. What could be the risks and opportunities of such an approach?
What Andrea Enria said is a reminder of a basic characteristic of the Single Market. Since 1992 the principle of the single licence allows a bank, as an entity, to perform its activity in all European Union countries. And this can be done by branches or by the free provision of services without even opening physical branches in these countries. Because of the considerable progress made in digitalisation for the provision of services, it is becoming more likely that this kind of use of the single licence could develop in the market without the need for any additional legislation. That's one of the important parts of the message. It does not mean that we do not want additional pieces of legislation. As you know, at the ECB we are very strong defenders of keeping the ball rolling on EDIS. But what we are saying is we don't have to wait. The pandemic provided new opportunities to use this old tool, with the wealth of experience that banks have gained through remote banking and the potential for efficiency gains. Branching is a challenge but also an opportunity to expand and transform. We think that in the present situation there's an opportunity for making more of the Single Market not just for the bigger banks that we supervise, but for the smaller ones too. A truly integrated Single Market should have every kind of business model and banks of all sizes, be they small, medium or large. There's no silver bullet for integration - we have to try to explore all the avenues. We are just reminding banks that this is an avenue that in the present situation offers a particular opportunity.
And how do you rate the prospects for banking consolidation within the European Union at the moment?....
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