ECB Encourages Banks to Diversify Revenue Pool on Low Rates

  • Lautenschlaeger comments in interview in New York on Tuesday
  • ECB’s Lautenschlaeger is vice chair of bank supervision arm

Banks struggling to make a profit in an environment of low interest rates should diversify their revenue pool, European Central Bank Executive Board member Sabine Lautenschlaeger said.

“It’s not my task to find a viable business model for each and every bank,” but “having a diversified revenue pool is always very good,” she said in an interview in New York late Tuesday. “You can see that banks are increasing their fee income right now, that they change their business model to shorter maturities when they lend in order to be able to change faster when the interest-rate environment changes again.”

Sabine Lautenschlaeger

Photographer: Martin Leissl/Bloomberg

The ECB, which directly supervises the largest banking groups in the euro area, has made profitability achief priority for 2016 after financial institutions ventured into riskier markets in search for revenue amid weak economic growth and a prolonged period of low interest rates.

Lautenschlaeger declined to comment on monetary policy. The Governing Council is widely expected to cut the deposit rate further below zero next week to bolster an inflation rate that hasn’t been in line with the ECB’s goal in three years.

Taking Risks

Lautenschlaeger, who is the vice chair of the ECB’s bank supervision arm, said that as long as changes in banks’ risk taking are supported by adequate risk management, capitalization and liquidity, “there’s no problem with it.”

“Banking business is taking risks,” said Lautenschlaeger. “It’s not about, as a supervisor, not allowing banks to take risks. But they’re supposed to take risks which they can identify, measure and manage adequately.”

In that context, sovereign bonds on banks’ balance sheets are coming under increased scrutiny from regulators around the world for their treatment as risk free with regard to regulatory requirements. The Bank for International Settlements argues that the treatment is based on a “misleading argument,” and two European task forces are studying the issue.

“Sovereigns, just because they’re sovereigns, shouldn’t get a zero risk weight,” Lautenschlaeger said. “They should be covered by capital, adequately to the risk they pose. I wouldn’t even ask only for capital requirements according to risk weights and risk sensitivity for banks. I’d like to see large-exposure limits for sovereigns too.”

Given the magnitude of such a change in rules for banks’ risk management, long transition periods will be warranted.

“I have no problems at all” to say “it takes 10 years, 12 years or 13 years before this new rule comes into force so that banks can cope with the adaptation process,” Lautenschlaeger said. “We need to do this globally.”

New Rules

Current rules give discretion to supervisors to allow banks to treat their government-bond holdings as risk-free. In the EU’s case, banks can rate all debt issued by the bloc’s 28 national governments as risk-free. There are also no limits as to how much a bank can lend to a single sovereign borrower, contrary to how other types of exposures are treated.

Other changes may be more immediate. The Basel committee said in a report to Group of 20 leaders in November that it was finishing up work on the leverage ratio and risk-weighted capital floors. Lautenschlaeger said regulators will talk in September and December about the “final calibration” of a range of rules that also includes a revised standardized approach to credit risk and a fundamental review of trading books.

“We need to ensure that this big package overall doesn’t lead to a significant increase in the capital level,” she said. “I believe that we have now reached a status where the capital level as such overall is sufficient.”

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