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Interview with Les Echos

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Guillaume Benoit, Édouard Lederer and Thibaut Madelin on 24 November and published on 30 November

30 November 2021

Banks are posting record profits and giving the impression that the crisis is over. Is that an illusion or reality?

European banks have performed fairly well recently. Since the pandemic, profitability has increased, but the main driver of this increase is the drop in provisions. This performance is therefore based on an optimistic scenario in which the recovery continues and there is no large wave of insolvencies. However, it is good to be very cautious, because once the government support measures are withdrawn, insolvencies and non-performing loans will increase.

Do you recommend that banks don’t release their provisions?

It’s something that should be assessed on a bank-by-bank basis. My recommendation would be to be cautious, because we don’t know what the ultimate impact of the pandemic will be, or what effect the withdrawal of support will have. That also holds true for dividends and remuneration policies. As supervisors and given our responsibility for financial stability, our role is to call for caution.

You are concerned about a correction in property prices. Could we say there is a bubble?

There is no definition of “bubble”. You know there is a bubble when it bursts. Our message is very clear: in the housing market, there are clearly pockets of overvaluation that go beyond the fundamentals. And this trend continued throughout the pandemic. Up until now, it was a localised phenomenon, but it is becoming increasingly widespread throughout the euro area. We must monitor it closely, as it comes against a backdrop of low interest rates.

What can you do to curb this trend?

The countercyclical capital buffers were released during the public health crisis to maintain the flow of credit. Now, the macroprudential authorities in some countries should start considering the possibility of increasing them again in order to increase banks’ resilience and temper the growth in housing loans, and thereby ensure there is a soft landing if the cycle turns.

Along with Germany and the Netherlands, France was highlighted in your financial stability review. Should France implement this measure?

I’m not thinking about any country in particular. But the European Systemic Risk Board will issue country-by-country recommendations in the near future.

Financial markets are also showing signs of exuberance. Should we be afraid of another accident like the Archegos collapse, which caused banks to lose 10 billion dollars?

The environment of very low interest rates has a greater impact on the risk appetite of non-banks than it does on that of banks. And these financial intermediaries are becoming increasingly important, including in Europe. To improve the returns of their portfolios, they invest in less liquid securities, and often accumulate debt to do so. The combination of this leverage effect and less liquid securities as well as riskier assets should give us cause to be vigilant. But regulation is weaker in this sector. As for banks, their levels of capital and liquidity have increased significantly since the financial crisis. But hedge funds and other investment funds are interconnected with banks and can have a system-wide impact. Archegos could be the canary in the coal mine.

Bank balance sheets have grown substantially during the crisis. This is the opposite of the “too big to fail” syndrome we wanted to combat after the financial crisis. Is this a cause for concern?

That’s correct. There has been a strong increase in bank lending. In France, the increased indebtedness of companies was accompanied by the increased accumulation of cash. So the increase in net indebtedness is actually very limited. What is important is that bank capital ratios remained stable, and asset quality improved. That’s why I’m concentrating on provisions.

The current wave of targeted longer-term refinancing operations (TLTROs) will soon draw to a close. Might the ECB extend this instrument?

The TLTROs are not finished yet. I think they have been a very useful instrument during the pandemic for providing short and medium-term liquidity to banks, but there is no urgency to decide on their renewal. We can wait a little longer; it’s not going to be a decision we discuss in December.

Does that imply that banks are still in need of support ?

The TLTROs are part of an emergency programme in response to the pandemic. Now that the situation is improving, the pandemic has left scars that need to be taken into consideration. Let’s not forget that TLTROs are not repaid on a fixed date but that there can be several repayment windows. So there will not be a cliff effect, and the repayment will be spread over time.

The new “Omicron” variant is emerging as parts of Europe are being hit by a fifth wave of COVID-19. Does this worry you?

Indeed, we have more bad news about the virus and are observing the situation of this new Omicron variant closely. The incidence rate in Germany is clearly on the rise and we have seen lockdowns reintroduced in Austria and Slovakia. It’s always unfortunate. But the situation is different from that in 2020. First and foremost, we now have vaccination. The vaccination rates in Spain and Italy, for example, are very high, in the region of 90%. Infection rates are highest in countries with lower vaccination levels of around 60-70%. Moreover, a policy of booster jabs is gaining ground, as is the requirement for a health passport. And the economic impact of a lockdown is no longer the same either, because the economy has now adapted to the situation.

Turning to payments, is the European Payment Initiative important in your view?

The banking union is key for establishing a truly European payment system. But it’s also essential to have a truly integrated interbank payment system, in terms of technological solutions and in terms of costs. Our approach is to support this initiative.

What will the success of this project depend on?

Such a system would have to be customer-friendly and efficient. The system should also be completely open to other banks wishing to join the project, not only in the euro area but in Europe as a whole. Of course, it could start with a limited number of countries in the initial phase, and we hope that this initiative can expand in the future.

Is it time to more strictly regulate the world of crypto-assets ?

The development of this market is rather impressive. I personally think that it will continue to expand rapidly. Up to now, the volatility that we have seen has not had an impact on financial stability. But at this pace of growth, we have to pay attention to it − especially in relation to issues such as terrorism financing and tax evasion. Above all, we have not yet focused enough on the combination of two risks: the acquisition of crypto-assets with leverage, in other words with debt. A market that is growing so quickly, combined with a leverage effect, generates stronger and more systemic connections with the rest of the financial system.

Are big tech firms also a source of concern?

Our basic principle is very simple: same activity, same regulation. If you grant loans, you should be regulated like a bank is. In terms of financial stability, however, I find these players much less worrying than the world of crypto-assets. Because the tech giants are large corporations with high market capitalisation and with a capacity for dialogue…

Are you still calling for banking consolidation in Europe?

I don’t think there has been cross-border consolidation. Any operations that we could see were on a much smaller scale. This is linked to the banking union, which has still not been finalised. We should welcome the incoming German government’s inclusion of this point in its programme. Once banking union has been achieved, we will have a common deposit guarantee scheme in addition to single supervision and a single banking resolution mechanism. I expect that consolidation will then play a more prominent role.

You recently said that certain inflation factors in Europe were becoming more structural, and therefore permanent. What are they?

The outlook for price developments isn’t entirely clear. What is certain is that the factors behind the high rate of inflation we’re experiencing will not last, and we should see them fade next year. But what I’d first like to draw attention to is that we underestimated inflation developments in 2021. Not only the ECB, but all forecasters. The European Commission published its economic projections two weeks ago, and revised inflation figures upwards.

Why? Because the base effects linked to supply problems and energy costs were stronger than we envisaged. In 2022, bottlenecks may last longer than expected. As a result, there’s a risk that inflation will not go down as quickly and as much as we predicted.

Could inflation become uncontrollable?

Amid the current uncertainty, it’s crucial to look at inflation expectations, to see what level they will settle at. For the time being, they’re a little below our inflation target of 2%, which is largely reassuring. But we need to remain vigilant to avoid second-round effects via wages. In that case, the upward inflationary trend could be more long-lasting. We haven’t seen any such effects yet. However, it should be noted that owing to the pandemic, most wage negotiations have been postponed to the end of 2021 and the beginning of 2022. So we should be very careful.

The markets have the impression that the next ECB meeting will signal a tightening of monetary policy. Is that the case?

What we will do is adjust our pandemic emergency purchase programme (PEPP) to the dynamics of inflation, to our economic forecasts and to the changing health situation. The programme was designed to deal with the consequences of the pandemic. Despite the recent rise in infections, COVID-19 will eventually fade away. But we will not go ahead with tapering (phasing out purchases), as the US Federal Reserve has done. The President of the ECB has announced that net purchases will end in March. But they could be resumed if necessary.

And after the PEPP has ended?

From a personal perspective, I think that monetary policy must remain accommodative after the PEPP has ended, because some of the scars left by the pandemic haven’t properly healed yet. Even if we have returned to pre-crisis levels of production and income. We must therefore keep our monetary policy accommodative, although not to the extent that we did at the height of the crisis in order to meet our medium-term inflation objective, and be even more driven by economic data.

Does that mean that an increase in the ECB’s key interest rates, which some market participants envisage happening by the end of 2022, isn’t a credible scenario?

We haven’t discussed that yet, but I’ll give you my personal opinion. If we look at our forward guidance (note: the ECB’s tool for steering market expectations) we have two main instruments: asset purchases and key interest rates. And we make it clear that we will start increasing our rates shortly after we have ended our net asset purchases. I’m confident that those net purchases will continue throughout next year. Beyond that, I don’t know.


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