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Ireland’s financial regulator, leading the European Central Bank’s post-crisis work on bad loans, warned against “complacency” as interest rates rise and urged banks to take the challenging outlook into account when setting dividends.
Sharon Donnery, a member of the ECB’s supervisory board, told the Financial Times that while banks were off to a better start than in the last downturn, they were dealing with “a very aggressive, very rapid rise in interest rates” that had not yet been fully passed on to households and households. small companies.
“There’s a big debate now about bank profitability and rate pass-through and what that means for dividends,” said Donnelly, who is also deputy governor for financial supervision at the Bank of Ireland.
“The thinking we have now is very specific to each institution’s situation. What does their book look like? There are big questions about digitalization . . . the level of investment that companies have to make.
“We expect . . . that banks should think more medium-term about the sustainability of their business models and the fact that there could be choppy times ahead if credit issues arise in the future.”
Andrea Enria, the ECB’s supervisory chief, has repeatedly argued against reinstating sweeping dividend limits on banks that were imposed during the pandemic.
European banks have generally posted positive profits this year as the gap between lending rates and funding costs widens. That has emboldened banks including Deutsche Bank, BBVA and Cex Bank to announce new buyback programs.
But analysts remain wary, worried that rising interest rates and soaring living costs will eventually trigger defaults that eat into profits, despite widespread tightening of bank lending rules since the financial crisis.
Some are also worried about policymakers’ efforts to get banks to raise deposit rates.
“The banks are clearly in a better position in terms of capital and liquidity, but you can never be complacent,” Donnelly said. “The cycle we’re in right now is very aggressive, very rapid growth in interest rates, and that growth comes from what we expect very different environment.
“We must remain vigilant that there may be further impacts in the future.”
In a wide-ranging interview, Donnelly also hit back at industry accusations that Irish regulators were “going out of business” after Brexit, frustrating banks’ efforts to do business in Ireland.
Several international bank executives have privately criticized Irish regulators for making it difficult for them to do business, prompting them to choose Frankfurt or Paris as their new EU outposts.
“There are a lot of companies that are looking at different jurisdictions, how they are going to organize themselves, where they are going to organize themselves,” she said. “Ultimately, of course there were some companies that didn’t come here . . . but equally, other companies were looking at other jurisdictions and ultimately chose here.”
Donnelly said Ireland, home to major operations of banks including JPMorgan Chase, Citigroup and Bank of America, had never seen it as a “competition” between different jurisdictions to win business after Brexit. The first priority is to become a “credible country”. Regulator” has “high regulatory standards”.
Nonetheless, she said Irish regulators had made changes based on industry feedback. “If we are being fair, we have to say that some questions have been raised to us about methods or sometimes timelines,” she said.
“Over the last year or two, we’ve tried to make changes to some of our processes and (give) an explanation of our expectations. . . . It’s really about helping the industry understand where we’re coming from.”
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