“Novobanco is an excellent example of a cross-border consolidation in Europe”

On a visit to Lisbon, where he met with the main bankers and national authorities, the chairman of the Single Resolution Board, Dominique Laboureix, promised to ease the burden of regulation on banks, but asked for time to implement the changes — even though he warned of the risk that the regulatory simplification agenda promised by the European Commission would “lower the bar” and “weaken the sector’s resilience”.

In an interview with ECO, the French official praised the progress made by Portuguese banks over the last decade with the reduction of bad debts and the increase in profitability. “They’ve been restructured, there have been many changes, but the process isn’t over yet”, Laboureix pointed out, recalling Novobanco, whose sale to Groupe BPCE represents an “excellent example of cross-border consolidation within the Banking Union”. “A few months ago people were saying that it was absolutely impossible and now the Portuguese banking system is showing that this is not true — it is possible”, he said.

Dominique Laboureix also touched on recent bank failures, including Credit Suisse and Silicon Valley Bank (SVB), to warn that “the typology of banking crises is changing”, which leaves supervisors on alert.

The SRM is turning 10 years of existence this year. What lessons did you learn in the last decade in terms of banking resolution?

After 10 years, we’ve taken two successful resolution decisions: Banco Popular in 2017 and Sberbank in 2022. You can tell me, but only two, it’s not a big success. To the contrary. It means that the resilience of the banking sector has been improved year after year thanks to these two pillars of the Banking Union — supervision and resolution –, also thanks to other elements, obviously, monetary policy fiscal support during Covid. But, globally speaking, if you put all these things together, we’ve built a much more resilient banking sector.

I would say it’s a success in building more resilience in the banking system, in the Banking Union and beyond.

And what are the main challenges you anticipate for the next decade?

So, there are several challenges, obviously. The first challenge is the fact that the typology of crises is changing.

This legislation and resolution framework started from the traditional types of crises, what we call the credit risk crises. There are losses in the banking portfolio, then obviously there’s an impact on the P&L, and at the end there is a risk in terms of reputation, and people start to say, “what is this bank?” and then they withdraw their money, and there’s a liquidity issue. This is the traditional and classical crisis. This was the case of Banco Popular in 2017 or even earlier of BES, here in Portugal in the national context.

What we’ve seen more recently with SVB or with Sberbank, it’s a different story. It started from reputation risks, sanctions, news — in the case of SVB — about the possibility to be in liquidity shortage and things like that. We are talking about of much more reputational risk, much more operational riskiness, and the speed of the crisis is faster. This implies for us an even stronger readiness. We need to be immediately ready to step in and to take the decisions we have to take. Hence, the decision to increase our readiness, to ask the bankers to be more ready and to be ourselves more ready by testing our capacity to act swiftly. This is one evolution.

A second evolution is obviously the influence of the new technologies. We have more and more recourse to Artificial Intelligence (AI) and digital tools. It’s a big opportunity but a new type of risk with cyber-attacks and things like that. So, we also need to be able to consider these elements. It’s an additional challenge which was not considered as strongly important as we consider it today 10 years ago.

In the last couple of years, the rise of interest rates boosts the banks’ profits and then the banks were able to generate capital and to boost their capital ratios. How resilient they are right now to adapt to these new circumstances, to face the challenges arising from the current environment of tariffs, Artificial Intelligence?

I mentioned resilience. What does this mean? It means that indeed we’ve built — the banks and us via the regulatory framework — this amount of elements which are not necessarily only capital and liquidity. It can be also governance. It can be crucially important elements for managing the risks.

We can say bluntly that we have been risk minimizers, we are minimizing some risks.

We’ve faced a number of events which could have created the conditions of a failure here or there: Covid, the energy crisis post-Ukraine war, Ukraine war in itself, the Gilt crisis in the UK, the SVB, Credit Suisse… This did not happen within the Banking Union. And even in 2023, with Credit Suisse, which is out of the Banking Union, just at the border, there were wobbles on some European banks, but immediately it stopped after a few days. It shows that this resilience, these risk minimizers are well in place.

The key element you raise about tariffs is the uncertainty. And we cannot reduce this uncertainty by essence. The macroeconomic conditions are changing quickly. What is difficult is obviously to project yourself in the mid-term and long-term in front of such uncertainty. This is not easy for the bankers. This is not easy for us to envisage the potential consequences of such a level of uncertainty. What we try to do, as a Resolution authority, is to reduce this level of uncertainty in my area, not reduce the geopolitical risk or tariff war, but I try to reduce the level of uncertainty in preparing ourselves to be able to find the right answers and not to discover last minute that we are facing a new typology of crisis or a new risk.

This is particularly important for us because we are in charge of the many groups which are cross-border, so we need also to be sure that we have in place a sufficient level of certainty about cooperation with the authorities, including the US ones, as an example.

Looking at the Portuguese banking system, we have now a normalised system, but some years ago we had a lot of banks facing a lot of problems. How do you assess the evolution of the Portuguese banks in the last years?

I don’t want to pick up specific examples, but globally speaking the story is excellent in terms of building this resilience I’ve already mentioned. In some years the situation has completely changed. Let’s recognize that: less non-performing loans, better profitability, the restructuration of the banking system with a lot of changes — and it’s not finished with a new one coming, the sale of Novobanco. So, it’s a strong banking system, globally speaking.

In terms of resolution preparedness, I can also say that indeed the Portuguese banking system has taken a number of steps to be where it should be in terms of expectations.

Are they are ready to face an event of failure?

This is typically the type of question I won’t answer by yes or no. If I say no, you will say they are not ready. If I say yes, you will publish, “he said that they are already ready”. So, obviously, I’m obliged to be cautious.

It’s a work in progress…

It’s work in progress, but the progress is well advanced compared — again — to some years ago. But are they able and all other banks — I’m not mentioning the Portuguese system only — to face a cyber-attack? I’m not sure. The risks are changing. This uncertainty is evolving and we need to still worry. I always say that I’m paid to worry. My job is to worry. So I’m never completely confident that we are ready entirely.

We are taking all the steps to be more ready than yesterday, perhaps less than tomorrow, but in any case, more ready than yesterday. From that perspective, I can confirm that the resilience building by the Portuguese banking sector, also on the crisis management side, is extremely positive.

Novobanco was sold to Groupe BPCE. It was the best solution for the system?

I will never speak about one specific group. However, from a global perspective, this is an excellent example of a cross-border consolidation within the Banking Union, within the 21 countries under the unique supervision and the unique resolution system.

There are some operations under political scrutiny here and there, in Italy, in Germany, in Spain, for different reasons. Here, we have a really good example from the Banking Union perspective of a decision from this group to buy Novo Banco and from the current shareholders to sell Novo Banco cross-border. From my perspective it’s really a good example to show that it’s possible that.

It also shows — and this is the story about Novobanco, and here I speak about Novobanco, which was a bridge bank which was sold to this American shareholder — that it’s possible to have a long-term positive story with generating value and making a foreign banking group interested in buying this bank.

So, it’s a really good example because it was said a few months ago, before this announcement, that it was absolutely impossible to have a cross-border consolidation in the Banking Union and now the Portuguese banking system demonstrates that it’s not true, it’s possible.

The Spanish Caixabank was also interested in Novobanco but the Portuguese government told that they wouldn’t be happy if a Spanish bank bought Novobanco, because that would mean that the Spanish capital would represent half of the Portuguese market. For you, as a resolution authority, is there any risk from the excessive presence of a specific geographical origin of the capital in one particular banking system?

I don’t want to comment on this type of positions because there are certainly reasons I don’t know here to take this type of position.

What I can tell you is that ten years ago, it was decided, not by me, but by the political masters at that time — the governments, the European member states, the parliaments, the Commission — to create this centralisation of supervision in Frankfurt with the ECB, SSM, plus obviously the local authorities, here Banco de Portugal, and of resolution, with the SRB, plus the local authorities, Banco de Portugal here again.

From my perspective, within the Banking Union, the question of borders does not matter anymore.

When I’m discussing the resolution plan of one bank, this bank can have Italian shareholders and be present in Ireland and Greece, this does not change for me. Except that we need to take into account the specificities of the national legislation when we compare the impact of the resolution compared to national insolvency. This is one of the things which is not harmonised yet and this is an impediment within the Banking Union.

The ECB wants more mergers between European banks to create bigger banks to compete with the American banks. In the last crisis, the subprime crisis in 2008, there was this idea of ‘too big to fail’ banks that created a lot of risks. Do you see any risk or a paradox between what ECB wants and potential risks arising from the creation of big banks? And also for the resolution authority, this creates a bigger risk, no?

Yes and no. I think there is a slight misunderstanding about this famous sentence, ‘too big to fail’. What was meant at that time is that these banks were so big that it was impossible to let them fail without intervention from the public sector. The missing element is ‘without the public sector intervention’. And the lesson from 2008, and we are all very well placed in Europe to know this lesson, is that it costs us an enormous price.

In a number of jurisdictions, including in Portugal, it cost us an enormous amount of money because everywhere there were injection of public funds in a way or the other. We decided to stop this and to implement a new system by asking the shareholders and creditors of these banks to pay first.

Normally speaking, the bank should be equipped to withstand the full price of its own failure. You can tell me it’s a very strange approach, but this is the mechanics of resolution. And it works.

In Banco Popular in 2017, the balance sheet was 160 billion euro, so it was already a big bank compared, for instance, to the Portuguese banking system, and it did not cost one euro to the Spanish taxpayers. Zero. It was paid by the shareholders, the creditors, and obviously by the buyer, Banco Santander, which paid one euro to buy this bank. And all the rest was supported by the shareholders and creditors.

You can tell me, “okay, Banco Popular was a small bank compared to the very big banking groups we have around the globe”. But, from my perspective, if the toolkit is efficient, it’s not anymore a question of size. Normally speaking, I can implement it whatever the size is the bank. I don’t tell you that it’s simpler to do it on a worldwide group.

For you it’s easier to work with the bigger banks than a lot of small banks?

No, it’s equivalent. What I just said is that — coming back to your embedded question which was the ECB supports consolidation so if this implies bigger banks — having bigger banks is not an impediment to the implementation of my resolution tools because they are exactly tailored to be implemented to a small bank or to a big one.

Normally speaking, it works. What changes, obviously, is the international footprint. If we are inside the Banking Union, this does not change anything from my point of view. The law is the same one, so no problem, except, again, the national insolvency laws.

When we go to an international group with subsidiaries in Latin America, Asia, U.S., Africa, it’s a little bit more complicated, but the mechanics are the same ones.

The European Parliament and the Member States have reached an agreement about the management crisis and the deposit insurance (CMDI) reform. Why this agreement is important for you?

It’s an important step forward because initially the idea was to give us improved, not new, but improved tools to tackle a high number of cases. In 2017, we had two crisis cases with two Venetian banks. The Single Resolution Board was asked: do you want to step in? And we said “no, they are not systemic enough because resolution is something for real systemic banks, not for the smaller ones”.

Both banks failed, they went to liquidation process, and the Italian state said: ‘the liquidation is too risky, so we will support, with public money, the liquidation process’.

This is exactly what the CMDI tries to tackle. “Ok, let’s increase the possibility for the resolution authorities to tackle this type of cases”.

For instance, a bank which is regionally systemic, not systemic at the level of a country, but regionally — and in Venetia, these banks were systemic, they were big banks for the local market, not for Italy –, and due to the fact that these mid-sized banks are not necessarily the best prepared, the idea was to find a way of using the DGS, the Deposit Guarantee Scheme resources, to build the capital stack, which could be absorbed by losses.

Two years and a half of discussions between Member States, Parliament, Commission until now, we are near to a green light. There was a political agreement last week. It needs confirmation by member states.

If they confirm that they agree, it means that we’ll be able to finalize it, the Parliament, the Council, the Commission will finalize the text.

What does this change? It gives us more optionality, more flexibility, and it should ease a little bit more our processes. It’s a very good initiative, it’s good for resolution, it’s good for the Banking Union because it improves the system. And it’s good because this one is down so we can go to the next one and the next one is the missing pillar of the Banking Union which is called EDIS. EDIS is the interconnection of the deposit guarantee systems to help building an even stronger Banking Union.

Do you believe that it will be possible to reach an agreement about the EDIS?

Not yet. It will take time. But one of the obstacles was “we cannot discuss it is because we have not yet agreed on CMDI”. So now, if there’s an agreement on CMDI, there is no reason not to come back to EDIS. EDIS started a long time ago, we certainly need to reshape EDIS to start from another angle. But EDIS is still needed because we have a solution and a resolution, but in terms of national insolvency rules, they are not sufficiently harmonized and EDIS could help here by building this interconnection between the different deposit guarantee schemes. There are plenty of technical solutions to build this third pillar of the Banking Union.

The European Commission is prioritizing an agenda of simplifying the regulations. Do you fear that this effort could increase the risks in the financial system, or there is room to do that simplification?

There are certainly plenty of elements which can be simplified. But obviously, as you just said, it should not be at the price of deregulation. That’s very clear. I mentioned the resilience of the banking system. I don’t want to weaken the banking system in the future due to these initiatives.

We need to understand what simplification means. Simplification can mean different things. One is, let’s simplify what is other burdening the banks with overlaps rules which are inconsistent. For instance, the initiative taken by Mrs. von der Leyen with the Omnibus Directive about the sustainability transparency can be an example of the rules which perhaps — it’s not my topic so I don’t know — but perhaps were certainly too detailed and perhaps we can just take some distance without changing the good idea but simplifying its implementation.

Another meaning of simplification for some bankers is to lower the bar, is to say, “well, you are asking us too much capital, liquidity, loss absorbing capacity”. And here I raise the question mark, “okay, but what are the consequences of such decision in terms of resilience in the banking system?” It’s not for me to decide. Obviously, if they change the law, we will implement the new law, but here I’m obliged to say “Be careful”.

Then there is also another element which is not at the legislative layer, it’s at the technical one, the one we’re implementing, is the way we implement these rules. And here we are really, really motivated to adapt ourselves, our processes, to simplify them, to alleviate a part of the burden on the banks.

We met the Banking Association of Portuguese Banks yesterday, also with the representatives of the different banks. And they said, “yeah, okay, that’s a good idea, but we don’t see concretely the changes”. And I replied, you cannot see them tomorrow morning but let us have sufficient time to implement these changes. It’s a long journey; it is the time to implement these new approaches.

What matters in terms of simplification is essentially not about lowering the bar, I don’t think it’s a good idea as I said, but it’s lowering the fragmentation between the European countries. It’s more harmonization of European legislations and with that we could have a better Banking Union.

We mentioned the cross-border consolidation. We could have a much, much better Banking Union if we had less fragmentation.

Do you believe that artificial intelligence will bring more risks to the system or it will help the banks to make better decisions? And how resolution authorities are using or implementing artificial intelligence on their work?

AI is definitely a game changer. It’s a complicated element because obviously no one now can survive without using AI, neither the bankers nor the authorities.

We are obliged to move to these new technologies which are crucially important because they are speedy, bringing new capacities in terms of analysing e processing a lot of data. So let’s take the good part of AI.

Obviously, the new risks are linked to the fact that AI uses cloud. So, when we go to notions like cloud, we go to notions like cyber risk, service provider risk, concentration of service provider, which are located in countries which are not necessarily keen to protect personal data, so notions like data protection. And we need to manage all these elements.

Then, obviously, the question beyond this is: is this a source of potential crisis risk? Obviously, yes, this is a potential source of crisis.

When you go to risk, you come back to the classical risks: credit, liquidity, operational risk. AI can generate operational risks via cyber-attacks, by blocking the bank in a way or the other. Another way is via reputation risk. If the AI is used to create fake content, blurring the image or sending fake messages, there could be a reputational risk, which should be tackled by the bankers first, obviously, and potentially by us, if there is a bank run.

So, interestingly, for instance, in the SVB, in 2023, the search systems found very old messages on the different websites saying “well, this bank is a bad bank”. And so immediately they recirculated messages which were six-month-old or one-year-old, and everybody clicked on these messages thinking that they were new ones, while they were old ones, but generated by the search engines which were able to find the key words.

So, this is typically a risk because a part of explanation — because there are plenty of explanations — is the increasing use of the social media, where the content can be partly true, partly not true. There is a need to monitor this risk very carefully for us.