Mairéad McGuinness, European commissioner for financial stability and financial services, has suggested tougher regulations may be needed to force banks into faster restructuring of loans that enter arrears due to the pandemic.
She said if the restructuring of distressed loans that emerge after State supports are reduced is not addressed early, “it will create problems down the line”.
“We are looking at whether targeted changes to financial regulation can incentivise a proactive approach. If this aim is not reached, banks’ asset quality – and in turn their lending capacity – could deteriorate.”
She warned that a build-up of nonperforming loans “will lead to a credit crunch” and expressed “concern” about a rise in soured loans if a surge in insolvencies follows the withdrawal of taxpayer pandemic supports.
She said the levels of insolvencies and bankruptcies in Europe were low due to massive government economic intervention, but are "expected to increase in time".
“Withdrawal of public support measures needs to be managed and communicated carefully,” said Ms McGuinness, addressing a webinar on the future of finance held by the Dublin-based Institute of International and European Affairs, which is this year celebrating the 30th anniversary of its establishment.
“Against this background, nonperforming loans are a concern,” she said.
She acknowledged concerns over the activities of so-called vulture funds that buy up bad loans from banks, but insisted they have a role to play, because when these loans are sold to funds it allows the banks to “continue lending”.
Ms McGuinness also commented on the recent decisions of foreign banks including Belgium's KBC and the British-owned Ulster Bank to exit the Irish market. She said a legacy of the last crash was that Irish banks were required to hold higher levels of capital to cover bad loans. She also said loan security was "more difficult and slower" to enforce here than elsewhere in Europe, and this also had capital implications.
"Irish banks are required to hold more capital to issue loans, reflecting a relatively more risky lending business. This may be one of the factors behind the decisions of private banking groups about their operations in Ireland. "
Looking towards the future of finance, she said the increased digitisation of banking would mean more bank branch closures. Before the pandemic in 2019, she said, on average 6.3 per cent of branches closed in most European states. “We know this will accelerate because of the pandemic,” she said.
She said financial products from big tech firms such as Facebook and new fintech platforms such as Revolut would increase competition and efficiency in the market, but they must be "subject to the same level of regulation and supervision" as traditional banks.
Ms McGuinness said the European Central Bank’s governing council will decide this summer whether to move ahead with the launch of a new digital currency, a “digital euro”, to facilitate retail payments.
“A digital euro could also have fundamental consequences for banking services and credit intermediation. Would there be a shift away from bank accounts and towards digital wallets? Where would digital euro be held? What would the role of banks be? There are more questions than answers at this stage,” she said.
Ms McGuinness also warned that the financial system would have to change significantly to support the switch to an economic sustainability agenda in Europe.
Former minister for finance Alan Dukes asked her about the European Commission's decision to link payouts to governments from the EU's Covid recovery fund with their performance against "country specific recommendations", which in Ireland's case includes a call for tax reform. Mr Dukes asked why there would be such a link. Ms McGuinness said the State was "not being singled out" but the EU wanted to ensure there were "long-term reforms".