“This time, banks are part of the solution"

When the corona crisis hit, the EBF, which represents 3,500 European banks, quickly entered into crisis management. Short and immediate lines were opened with the European Central Bank, the European Banking Authority and national banking assocaitions. Together with a small group of key individuals, EBF CEO Wim Mijs managed to get a lay of the land and act quickly. The first question: how can the banking sector urgently support the customers. And then: What happens if companies go bankrupt? What happens to the banks?

“Everything stopped overnight. Business had to halt their operations and people had to stay home. What the banks did was to immediately provide liquidity and offer payments holidays. And this time the banks were in a position to do this. Compared to the 2008 crisis, the banks now have a higher level of capital and liquidity, which can be used to support the customers. The banks are now part of the solution.”

According to Wim Mijs, several things have improved since the last crisis. One is that the banks have higher levels of capital and liquidity, the other is the Single Supervisory Mechanism, SSM, in the euro countries. Another improvement is the quick response from governments.

“In 2008, the governments hesitated. But this time, several countries presented guarantee plans almost immediately. This was important to the banks, as there was a great deal of uncertainty regarding the customers’ situation. Thanks to the cooperation between governments, regulatory authorities and banks, the economy remains afloat. The problem is of course that this situation cannot go on forever. Which is why the recovery is so important."

What are your predictions for the future?

“As long as there is no vaccine, we will have to live in this 1.5 metre-society. This will pose a challenge for the economic recovery; for businesses of course, but also banks. The amount of capital is, of course, not infinite.”

Something that will be even more significant going forward is the disparity in the EU countries’ ability to help their economies.

“Many governments have decided to provide economic support on a scale hitherto unseen, which is good. But large economies, such as Germany, can organise public aid packages completely different to those of countries such as Portugal, Italy and Greece. Now that the first wave is over, we need a European solution. We cannot afford a situation where strong countries can bolster their economy with large amounts of money while other countries are unable to do so. This is why the recovery plan that was proposed by the European Commission is so incredibly important.”

According to the proposal, EUR 750 billion will be used to rebuild the European economy through support to areas such as innovation and growth companies. The proposal is currently being negotiated by the countries in the Council of Ministers.

“It looks good on paper. We need to see how we can rebuild our economy, and there is no doubt that this must be done in a sustainable fashion. We need to use this opportunity to accelerate the transition of companies to more sustainable way of production and distribution.”

Wim Mijs praises the capital and liquidity framework that provided the banking sector with sufficient buffers which can now be used during the crisis. But he also believes that there are some lessons to be learned regarding the framework, as well as some revisions that should preferably be made. This is about how the Basel Standards are to be implemented in the EU going forward, but also the IFRS 9 reporting standards.

“The corona crisis is the ultimate stress test for the banking system. We need to take a good look at the elements that do not work. The Basel Standards is an international agreement, and thus a compromise of a compromise. The standards are clearly not designed for a bank-financed economy like Europe.”

In other parts of the world, such as the US, a larger part of the economy is funded by the capital markets instead. As such, those countries are not as affected by what the Basel Standards refers to as the output floor, but in Europe, this can mean a cost for the economy in the form of the bank’s ability to lend money being diminished.

“This is why we must carefully consider how we implement Basel. If tighter capital requirements actually makes the crisis even worse, there will be problems.”

The IFRS 9 reporting standards have also been put to test by the crisis and need to be reviewed.

“Everyone predicted that IFRS 9 would have a pro-cyclical effect. Now they have been proven right. This discussion has been going on for 15 to 20 years. It started with the predecessors, IAS 32 and IAS 39. The IFRS Board now has a clearly defined task: conduct an honest study of what has worked.”

“Part of the problem is that the regulations require the banks to force bankruptcies. Banks know their customers and know them to be solvent, but they also know that their clients face liquidity problems due to the crisis. The regulations were of course designed with the danger of nonperforming loans, the NPLs, in mind. But they need to be reviewed.”

EBF has several things on its wish list in the wake of the crisis, one of them being a review of PSD 2.

“The payment system has proven very resilient. Now we need to ensure that all the expensive PSD 2 ideas do not risk destroying this resilience. Innovation is good, but if you undermine the payment system, it can come back to bite your tail at a later date.”

The EU’s digital transformation should also be sped up with regards to cloud services, digital infrastructure and cybersecurity. The digital transition has taken major strides this spring as many have been forced to work from home due to the spread of infection. One of these people is Wim Mijs, who has been working from home in the Netherlands since the start of the crisis, using the office in his music studio. 

 

The European Banking Federation, EBF The European Banking Federation is the voice of the European banking sector, bringing together 32 national banking associations. The EBF is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere.