It is no longer time for impositions or meddling. After the sacrifices made during the toughest period of the pandemic, the European banks they begin to become impatient towards the action of the ECB and its Supervision, whose interference in the management of individual institutions is considered excessive and unreasonable. Second II Sole 24 Ore, there would be three fronts on which the banks are preparing "for the clash": the arrival of possible new restrictions on dividends e buy back, the unilateral revocation of the terms of the loans More and the excessive presence of Supervisory supervisors during bank board meetings.
Presence of inspectors on boards: Bini Smaghi's letter
This last point has been elaborated on by Bloomberg, which revealed the contents of a letter from Lorenzo Bini Smaghi, president of the Société Générale and former member of the executive council of the ECB, addressed to the director general of the European Central Bank, Ramon Quintana.
“As far as I know, no other authority in the major advanced economies participates in board meetings and committees in its oversight activity – he wrote – Not the Federal Reserve, nor the Bank of England, nor the Swiss National Bank, nor the Finma. Some ESAs have adopted this practice in the past, with seemingly little benefit and serious concerns raised by supervised entities."
Inside the letter, Bini Smaghi requested a meeting with the number one in banking supervision, Andrea Enrico and the presidents of other major European credit institutions "for an exchange of views on how to ensure a correct assessment of bank governance". According to the manager, in fact, the presence of inspectors during board meetings, it would render internal discussions ineffective board.
Dividends and buybacks: no prohibition, the Supervisory Authority calls for caution
Another hot topic are the distributionand dividends and the programs of share repurchase own (buy back). In an unprecedented move, in March 2020, the supervision of the ECB asked banks in the Eurozone to don't pay dividends, not to undertake coupon payment commitments for the years 2019 and 2020 at least until the month of October (one Recommendation then extended to 2021), and not to carry out buyback programs aimed at remunerating shareholders.
Last June, during a hearing before the European Parliament, the number one of the Supervisory Authority Andrea Enrico he said: “In the euro area we cannot rule out the possibility of more adverse scenarios on economic growth and inflation. There is the possibility that new sanctions against Russia will be introduced or that those already in force in the energy and raw materials sectors will be strengthened, and it is also possible that retaliation will come from Moscow”. If these are the developments, "we will propose to the banks to recalculate their capital levels for adverse scenarios and to use the recalculation for profit distribution plans", ie to establish the amount of dividends.
Bank managers are therefore concerned that the ECB supervision push to postpone the return to normality again in the matter of dividends and buybacks. For the moment there does not seem to be any ban on the horizon, but – as Il Sole 24 Ore explains – “signs of moral suasion targeting individual European banks are multiplying to reduce the distribution of coupons to shareholders with respect to the plans announced to the market. An invitation to caution which, if it were really accepted by the banks, would have a serious impact on the current valuations of the Stock Exchange which so far in many cases have been supported precisely by the expectations of maxi buybacks".
Tltro loans
In the course of 'last meeting in October, in addition to raising interest rates for the third consecutive time, the ECB has announced a unilateral modification of the conditions of the Tltro loans from 2.100 billion. The LTTER “needs to be recalibrated to ensure it is consistent with the broader process of monetary policy normalization and enhances the pass-through of key rate increases to bank lending conditions,” the ECB. Starting from 23 November 2022 and until the maturity or prepayment date, the interest rate on TLTER 3 will be indexed to the average of the ECB's reference interest rates, while banks will be offered additional dates for the voluntary prepayment of the amounts . And again: the remuneration of the required reserves will be fixed at the rate on deposits "in order to align this remuneration more closely with the conditions of the money market", said the Eurotower. For long-term refinancing operations, in particular, a rate indexed to the average of the ECB rates for the duration of the loan will be applied.
The reason for these decisions is easy to say: given the increase in rates on deposits, banking institutions would have benefited from 20-25 billion in risk-free earnings. Profits which, however, would have translated into a heavy net loss for the Eurosystem. Hence the decision to change the terms and conditions which will in all likelihood lead the banks to ask early repayment of loans.
It should be emphasized that both on dividends and buybacks and on Tltro loans, the banks await the opinion of the European Banking Federation.
European banks against ECB supervision, Enria: "Avoiding the mistakes of the past, more attention to risk management"
To the concerns expressed by European banks the manager answers remotely ECB banking supervision, Andrea Enrico, speaking at a conference of the Bundesbank. Despite “the market's positive expectations on bank profitability”, there are “good reasons to ask banks to focus more on monitoring and managing interest rate risk. This is a delicate moment and past mistakes must be avoided,” Enria said.
“The increase in interest rates – he explained – was an important factor in improving the profitability of European banks in 2022” and both banks and analysts “expect that the positive effect of interest rates on net interest income continue in 2023”. However, she cautioned, “there is a worrying dissonance between these positive expectations and the unique combination of risks we are facing. Growth prospects have continued to deteriorate this year, while inflation rates and inflation projections, and with them the level of interest rates, have risen. All of this takes place against a backdrop of historically high levels of debt, amid several pockets of rising credit and counterparty risk for banks, and with little room for monetary and fiscal support measures. All these elements – she reiterated – require prudence, careful risk management and greater vigilance ”. And for this the ECB “is finalizing a review of interest rate and credit spread risk management practices at a sample of banks particularly exposed to such risks”.
“Regardless of the prudential and accounting regimes – he continued Henry – banks should not overlook the impact that rising rates typically have on the present value of their equity”, which when it falls translates into “worse long-term earnings and capital adequacy prospects, which in turn undermine the ability of the sector to attract investment”.
