MNI INTERVIEW: Italy NPL Plans Stray From Norm-Bank Supervisor

Italy’s plans to change rules on non-performing loans risk undermining the drive for harmonised rules across the eurozone, a senior banking supervisor told MNI, pointing also to the danger that government attempts to impose taxes on banking profits could erode financial sector incentives and stability as the economy slows.

While Europe’s banks are better capitalised and face lower levels of bad debt than in the wake of the financial crisis, the European Central Bank’s Single Supervisory Mechanism is looking closely at credit risk as the interest rate cycle nears its peak, and particularly at commercial property, Supervisory Board member Kerstin af Jochnick told MNI in an interview.

Banks face other risks as governments contend with high public debt and faltering growth. Italy’s move to impose a windfall tax on banks was criticised in an ECB legal opinion last week, and af Jochnick said the country’s plans to allow debtors to repay bad debts at less than their nominal value strayed from the harmonised approach which has seen bad debt fall across the bloc.

“Addressing the issue of distressed borrowers is of course welcome, but it is important that banks have functioning NPL markets that allow them to reduce the volume of these types of loans,” she said. “In general, as a European supervisor we would like to have harmonised rules across Europe and harmonised supervisory practices, which will also help to enable more cross-border banking.”

COMMERCIAL REAL ESTATE

Windfall taxes on banks imposed by Italy as well as by Spain and Lithuania are also damaging, and could distort incentives, she said.

“If a tax were to target net interest income without taking into account provisions and costs, it may be that banks record low profits or losses at the time when the levy is actually collected,” she said, adding that “it would be detrimental if investors were to expect that from time to time governments or parliaments think that banks are earning too much and it's easy money to tax them. Banks also need to be attractive to investors, otherwise they cannot provide the support to the real economy that we all want them to.”

While European supervision has overseen strengthening banking metrics, the challenge of the slowing economy is complicated this time by post-Covid changes including a significant shift to home-working and internet purchases.

“The real estate sector, particularly the commercial real estate sector, has for rather a long time been an area of focus for us, on which we have challenged banks,” af Jochnick said. “The demand for commercial real estate has fallen because people are working from home and, more generally, because they have changed their consumption patterns following the pandemic.”

AT1 MARKET

Despite advances during a decade under the Single Supervisory Mechanism, banking union remains incomplete, with progress stalled towards any joint guarantee of deposits, a key condition for genuine cross-border banking and mergers. Still, af Jochnick said she was optimistic.

“I think we will see the full banking union up and running, but it will take time.,” she said. “Achieving banking union has been a step-by-step process, and I think that is a little bit the way the EU works.”

Room for improvement remains in coordination between jurisdictions, as demonstrated earlier this year when the Swiss banking authority addressed the crisis at Credit Suisse with measures which both the European Central Bank and the Bank of England felt undermined the market for Additional Tier 1 bonds. (See MNI INTERVIEW: Swiss Should Explain Why Emergency Plan Ignored)

“The lessons learned from this spring are being discussed by the Basel Committee for Banking Supervision and the Financial Stability Board. I think that these discussions will also cover cooperation among authorities, because we really want to work efficiently during crisis situations,” af Jochnick said, “In most cases, it has worked and there has been a good exchange of information. In this specific case, we had different views on the treatment of AT1 instruments.”