Panayiotis Rougalas
The Chairman of the Single Supervisory Mechanism (SSM), Andrea Enria, has emphasized that the gains from high interest rates for banks will eventually come to an end. He points out that some banks have overly optimistic forecasts and may not fully grasp the uncertain economic environment. However, he clarifies that the SSM won't obstruct banks from paying dividends to shareholders at the supervisory level. Still, he urges credit institutions to be cautious about credit risk and take appropriate provisions.
In a recent interview with Bloomberg news agency, Enria, who is among the last to hold the position of SSM Chairman, delivered several messages to banks. He highlighted the importance of managing profits resulting from increased interest rates, investing these profits to fulfill their business plans, and addressing the introduction of a fixed tax, a topic under discussion in European countries, including Italy.
On the issue of imposing a tax on bank profits, a subject under discussion in Spain and Italy, Enria expressed reservations.
Enria stressed that banks are currently depleting their capital despite reaching a profitable stage and regaining investor confidence through dividends. He believes banks should redirect their focus towards investments in their future, including areas such as the green transition, digitalization, and strengthening IT infrastructure to combat cyber risks. He expressed the hope that the era of constantly increasing dividend distributions would stabilize, allowing banks to concentrate on expanding their franchises.
Returning to the topic of interest rates, the European banking supervisor noted that the environment remains highly uncertain. The rapid changes in interest rates leave many questions unanswered, including their potential impact on asset quality and provisioning requirements. Enria urged banks to exercise caution in navigating this evolving interest rate landscape.
Regarding discussions about establishing a single funding profile for banks, Enria argued against such a one-size-fits-all approach. He emphasized that banks should determine their funding arrangements based on their business models. Diversified funding sources, he stated, are favorable, but stable funding sources are equally important for risk mitigation. Enria stressed the importance of effective monitoring and management of funding and liquidity risks by banks.
Enria also weighed in on the topic of mergers in the banking sector. He encouraged banks to consider mergers based on their business strategies and market perceptions. He expressed concern that banks might solely use their profits for dividend payouts and highlighted past examples where banks sold unprofitable business segments and acquired others to gain competitiveness in specific market segments, such as asset management, leasing, and custody.
On the issue of imposing a tax on bank profits, a subject under discussion in Spain and Italy, Enria expressed reservations. He noted that a prolonged one-off tax could harm the banking sector, reduce the attractiveness of investing in European banks, and create uncertainty around profit retention.
Enria touched on the liquidity of European banks and their resilience in comparison to the challenges faced by Credit Suisse. He acknowledged that liquidity and funding risks hadn't been a major focus in recent years due to banks being flush with liquidity, thanks in part to central bank interventions. However, as monetary policy normalization has begun, attention has shifted back to these risks.
Enria clarified that the objective isn't to impose universally stricter requirements but rather to delve deeper into the liquidity and funding profiles of individual banks. Supervisory efforts have included planning to replace TLTRO (targeted longer-term refinancing operations) funding. Evaluations have assessed the volatility of funding sources, the concentration of funding, and the importance of diversifying funding sources. Additionally, the ability of banks to access central bank facilities easily, with sufficient collateral already placed or readily available for registration, has been a focal point of scrutiny.
In essence, Enria emphasized the need for a nuanced approach to assess and manage liquidity and funding risks tailored to the specific circumstances of individual banks, ensuring they are well-prepared to navigate changing market conditions.
[This article was translated from its Greek original]
