EU Banks Face Extra Checks on Sovereign Bonds, Regulator Says
(Bloomberg) — Europe’s banking supervisors are carrying out extra checks on the risks around lenders’ multitrillion portfolios of sovereign bonds, according to the head of one of the region’s top watchdogs.
As some core European bond yields surge to multiyear highs, Francois-Louis Michaud, chair of the European Banking Authority, said banks’ government debt portfolios needed enhanced monitoring. “That is what supervisors are doing,” he said in an interview at the EBA’s Paris headquarters.
Michaud added that exposures so far seemed to be “contained,” with the impact of higher net interest income from bonds “largely offsetting” the effect of lower bond prices on the economic value of banks’ equity.
“We don’t see banks suffering from what is going on so far, and we are convinced that supervisors are doing what needs to be done there,” he said.
European banks held more than €4 trillion ($4.5 trillion) in sovereign bonds – equal to about 13% of their assets – at the end of last year according to the EBA’s most recent risk dashboard. They can hold sovereign debt of European Union countries without any capital backing, though the EU’s banking competitiveness package proposes charges for concentrated exposures so banks are less likely to be dragged down by the woes of their sovereign.
Michaud said that the current capital rules did not mean that banks could ignore sovereign bond risks. “Technical treatment is one thing,” he said, adding “the way you manage your entire balance sheet is another.”
“So, of course, there are conversations between supervisors and their banks on to what extent they are exposed to sovereign yields and how they are managing and hedging that, and then there are policy tools that can be used,” Michaud said.
The official, who became EBA chair in mid-April after six years as its executive director, declined to elaborate on those policy tools.
Michaud said the potential hit to European banks from any crash linked to artificial intelligence also appeared “contained.” “It’s a piece of an exposure to the ICT sector and exposure of EU banks to the overall ICT sector is 4%, that gives a bit of comfort,” he said.
Still, he said there was a “lot of attention” given to the topic by the EBA’s board of national supervisors. “After competitiveness, it’s probably the second-most discussed topic at the moment in our groups,” he added.
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