 Good. Hello and welcome to everyone and in particular our guest today Jose Manuel Campa Jose Manuel is chair of the European Banking Authority one of the three supervisory agencies established During the euro crisis more than a decade ago He is eminently qualified to both speak to us today on the topic that he's speaking on as you know and To lead the EBA he's a Harvard educated academic economist something he spent most of his life Doing teaching researching. He's also been a banker and he was Spain's deputy economy and finance minister during one of the most challenging times in in recent times the Great Recession and the start of the euro crisis between 2009 and 2011 He's going to speak to us for 20 25 minutes and after that he'll take questions and Commons and Everything is on the record Jose Manuel. Thank you so much for coming Thanks and first of all, thank you very much for inviting me It's been a real for me a pleasure and I want to be with you today and I look forward to our exchange of views I will make some reflections on you know, how I see the banking sector today The situation is confronted within the broader context of the challenges to the European economy And then I look forward to the to the exchange As it was say, I'm the chairperson of the European banking authority The European banking authority is an authority and the European institution part of the European Union institutions That was created Partially as a response to the great financial crisis that was mentioned in the introduction in 2011 it was one of three authorities that were created by the European Union actually three or four authorities three thirds of one institution, which is the The banking authority the Esma the European Securities Market Authority will responsibility on securities markets a Yopah It's a responsibility on the insurance sector and the European systemic risk for with macro potential Responsibility or with assessment of macro risks These authorities have been functioning for the last 11 years now In the area of banking We all have essentially the same responsibilities Which is to work towards the creation of a single rulebook by developing secondary legislation in the European Union within our areas of Competence and at the same time to foster Supervisory converter of convergence and ensure financial stability Now how that has evolved of the last decade in the different sectors a little bit different I will talk particularly about the European banking authority with the banking sector. Of course, we have since 2014 Banking Union Supernatural supervision for larger systemic institutions At the it within the banking Union at the SSM So the so our mandate on banking supervision has progressed a lot because there's a lot of effort that has been done by the SSM to ensure on genius supervision across the Union Still a fair amount of work that needs to be done to foster that coordination between Euro and non-euro and non-euro area member states and that's a big challenge, but overall it's been good In the area of regular to our regulations was in the regulation the banking sector also again, it's more Integrated the sense that it's more under regular under regulation rather than directives at the European Union level So it's more of a single rulebook that has progress farther than the other areas That's in which we have progress farther Third on financial stability as you're probably aware the European bank authority does stress this of the banks every two years to assess the assessment this has been very much of the forefront from the beginning of the of the creation of the of the authority back in 2011 were precisely the banking sector was at the core of Concerns about the stability of the European Union finances sector Beyond that we have integrated responsibilities in other areas particularly in the case of the EBA where responsibilities for payments and developing the relationship on payments and ebony type of activities and then a PSD too Also for anti-money laundering We are responsible for antimony for courting anti-money laundering this scenario Which as you probably know the European Union has put forward a package to enhance Again more regulation at the European level and more super national supervision with the proposal to create a new authority A new AML authority that will be responsible for the supervision of the large institutions And we're very keen for that to take place at that time We will transfer those responsibilities to that more recently We also have responsibility with the other isas on three important aspects on sustainability climate related regulation in the finances sector on Operational resilience of the financial sector digital under what's called the digital operational resilience act and finally on The regulation of crypto assets the markets for crypto assets So this was a relatively long with the introduction, but at least to be put you in context Of who we are and where we operate now if I may go to the context of my remarks It's a more focus on the situation of the banking sector within the broader context of the Economic situation, so it's fair to say that we are confronted with just discussing this earlier before we started But we're confronting a moment of a relatively large economic uncertainty It's only a moment of significant change In the economic environment in which we go from a decade of very low interest rates almost closed in Europe Sometimes negative interest rates into an area of positive interest rates. We're going back We're going to that transition not just in Europe, but across all the Western world With interest rates going up at the same time that we're confronted with two significant real economic shocks over the last two Three years one was cobit and the aftermath of cobit the second one was the geo-political tensions not arose last last last year particularly the Invasion of the other aggression of Russia towards the Ukraine that had significant implications in terms of Reassignment of relative prices reassignment of negative shocks to the economy going forward within that context if I may The performance of the banking sector in Europe has been very resilient March resilience in some ways I believe we go farther be a bit surprising that has been so resilient partially thanks to the Exceptional monetary and fiscal policies that were put in place To confront those challenges, which were very assertive at the European level, but you cannot always count on them particularly not exactly so we're now in a situation which we have a banking sector that has a very good performance in terms of asset All in terms of balance sheet parameters the level of capital of Banks is about 15% according to the last number a little bit above 15% according to the last numbers correct with the tier one which is It's not an all-time high, but very close to the all-time hand Significantly much much larger that it has been a decade ago The liquidity situation of the banks is also very comfortable with a hundred sixty three percent on what we call the liquidity coverage ratio Which is the regulatory ratio that we used to assess short-term liquidity of banks the regulatory Requirement is a hundred percent and it's on a sixty percent again close to all-time highs The profitability of the sector which has been a challenge Over the last decade in which profitability has been low particularly below the cost of equity according to the Estimates by financial markets has improved of the last two years with interest rates Sorry, we return on equity For twenty twenty two office likely above eight percent, which is the highest in a decade So that's been good and the asset quality of The banks has been good the ratio of non-performing loans has been declined substantially Substantially, but more importantly constantly throughout the last five years all through the COVID crisis We saw the improvements in the ratio of non-performing loans We were surprising to us and partially this due to two aspects I mentioned before one was the exceptional monetary or fiscal policies that were put in place to support the economy at the European level The other one was that some of the legacy Non-performing loan portfolios from the great recession the financial crisis that were still in the balances of banks in some parts of the union continue to decline significantly particularly when I think about some of the countries that have been subject to programs Greece and Greece in In Cyprus as well, you know those ratios continue to decline So those are all good signs and they're encouraging our forecast or our concern Has been of the last three years that we need to be prudent because we will expect First with COVID and then with the with the tensions that happened out of the Geopolitical tensions last year will expect that will be a deterioration of the economy and that deterioration of the economy will manifest in self Indicates in credit quality of the banks as I said before that has not materialized yet We think that some of it may materialize as we go forward as the economy did your race On top of that and you may have been aware of this Over the last three months. There's been moments of tensions in the banking sector across the world, particularly in the United States and In Switzerland there have been cases of resolutions of banks and bankruptcy of banks For different reasons which I'll try to summarize in the United States. There was particularly concerns about potential The possible runs and liquidity management concerns as interest rates rise as interest rates This has different impacts on the banking on the banking business depending on the business model of the banks One immediate impact is that obviously on the loans if they have a variable rate loss They can increase the net interest income because that's good for them on the liability side on the other hand depending on their ability to price So all their requirement to reprice the liabilities They may have less of a demand and that's actually what we have seen many European countries as we go along This first cycle of the economy of the of the interest rate increase In which we see that the asset size particularly where there were variable rate loans have been reprised However deposits prices continue to be relatively sticky At the same time if they have fixed income assets like that and things like that the value of those assets may drop as interest rates rise And that puts tension on the attention on the bank's balance sheet overall That led to some concerns as I say in particularly Silicon Valley Bank in the United States that was resolved But then additionally other concerns about the asset quality of the banks particularly in commercial real estate also increase the Uncertainty about the future banking sector raising They're all resulting in the intervention of other banks like this like first Republic Bank And we have not seen that in the European Union so far. We have not seen that mainly because of two aspects I would think one is because there was no such a Extreme business model in terms of concentration of uninsured deposits on the liability side Concentration of how to maturity performance of that in the asset side of the banks in any bank in Europe that will that will materialize The same way that it is in the United States. That's one aspect Second also because the trends that are affecting the real estate market in the United States in a much more A clear way that's probably affecting the European although the underlying structural changes and challenges may be similar Just the way at the speed in which is materializing is taking longer Europe But that's a potential area of concern from our side as we go forward Having said that let me just I'm conscious of the of the time that I've been allocated. I want to try to to to use it effectively Having said that about the door the environment and in terms of the economic conditions It's fair to say that there are a number of other risks and challenges Affecting the sector overall that I think we need to to be aware of unconscious and try to address them You know, I'll try to focus on four, you know The first one is in terms of operational resilience of the sector, you know, we are moving into a sector that Has been Obviously digitalized over time now that operational resilience has many dimensions to it, but it's an area of concern I'll try to make it so briefly three on those directions three potential risks and what that is that we see there first one is cyber security In a moment and this we it's very high on our list of risks in a moment with the geopolitical tensions And particularly over the last 12 months We were very concerned about potential cyber security risks on the on the operational side of the banks This poetry has not yet materialized But this scenario which we should continue to remain vigilant and it's very important second one related to that Which is not about cyber security itself is digital operational resilience The sector has become much more digitalized It has subcontracted a lot and a lot of that subcontracted has moved away from the financial sector into other operators Just to be very simplistic basically the banks are moving things to the cloud and the cloud providers are not financial And I'm not financially they're not either regulated. It is in addition to that. They're very concentrated So concentration risks on that operation resilience is very large because a few operators are basically providing services to a Large amount of the European Union financial sector. So that's a second risk third one that I mean To this is through digitalization. This has already materialized very closely the crisis. I mentioned in the United States There's a much much bigger ability to move money faster across the world That they lead to the positive runs and provide financial instability But they also lead to more abilities to financial crime. Therefore, they need to enhance our am a practices I may lead potentially to vulnerabilities the banking sector either because of compliance concerns on money laundering or because just the quantity concerns on a potential Deposit of energy crisis. So that's public area all the operational resilience aspects Now very much to the operation resilience a second big challenge to the sector is more broadly technology and Competition and drivers of technology that's coming into the industry This is transforming many sectors in the economy The financial sector and the banking sector in particular. It's an intermediation sector when we think about intermediation Sectors in the economy. They've been heavily transformed when I think about real estate agencies when I think about travel agencies What I think about music music distributor any kind of distribution the economy has been heavily affected by technology Well, the financial sector is a distribution And industry with less distribution that may be affected from the payments sector to the transfer To potentially other parts of the sector and that's a challenge that needs to be assessed carefully and regulated going forward Third aspect which is not particularly for the banking sector, but it's more general to European economy Of course affects the financial sector banking sector is sustainability so that you all know the Priority the European Union puts on the transition to a sustainable economy the implications that that has in terms of the challenge That has in all dimensions of how to transform our economy The financial sector has a role to play there at least if not more than one But at least one which is to make sure that they started with financing To finance the transition and to try to transfer the the productive capacity of the productive Activities that the European Union performs banks need to make progress in that direction And we're pushing them heavily to advance on that direction. And then the fourth one if I may it's regulation We're operating and I said I started this by saying the European Bank Authority has reponses responsibilities for developing a single market in the European Union We're operating in a single market that It's incomplete to say the least we're operating a banking union that's incomplete And we're operating a situation with the benefits of that single market across border provision of services the capability of Generating risk diversification across Across the private sector by channeling money From ones from one parts of the Union to another parts of the Union from wherever the savings are to wherever the investments are It's difficult and it was we need to progress and we have been And We have been I would say slow But slow implies movement. We have been a slow in finalizing the banking union and in progress in that area And that's an idea which we need To continue to push forward with the momentum. It's not there in the short term But we need to to be built as we go forward Join me with that and not so much having to do with the European Banking sector in particular, but more broadly with the financial sector We also have to think about the structure of our financial sector in the context of a post-Brexit European Union And the context of a post-Brexit European Union I like to say you know the United United Kingdom was a member of the Union was one country in the Union Was more than one country When you think about in terms of the GDP and the relevance in certain parts of the economy It was only more than one country when we think about the financial services of the European Union And that's a challenge that we need to address going forward Which will be pending again This is this has a little bit to do with banks because at the end the key Channel that remains for financial intermediation in the European Union right now is a banking sector because the capital markets is undeveloped underdeveloped But in that sense it has to do with banks, but it's not only with banks And we know there that all the agenda finalizing the capital markets Union in the European Union finalizing starting I would say maybe pursuing the capital markets Union is it's a very important aspect of that agenda So within that context I'll try to stop here. So I said the banks sector in particularly have been resilient in the European Union They show to the seem to have now a good starting position in terms of balance sheet in terms of liquidity In terms of the performance as well Low as a quality in the end and they're operating okay in a macroeconomic environment There is uncertainty with recently materialized and are likely to materialize as as I would like to think going forward Within our third Monday that I mentioned before of financial stability We're now in the middle of performing the stress test that we do every two years for the for the banking sector in the Union We will publish the results at the end of next month in July We hope that those results will help as you know with those results. We publish a large amount of bank specific information We hope that those results Will help in enhanced transparency in enhanced confidence and will also help Supervisors engage with the with each in your bank On how they are their assessment is of the situation going forward and what their witnesses are so they can address them And that's part of our confidence building process but it's a context in which Given the assurance around the macroeconomic environment given the incomplete banking Union and given the challenge that I mentioned before an operational resilience sustainability and technology It's something that we need to call the name white village at vigilante as we go forward