François-Louis Michaud's interview with Il Sole 24 Ore: The main risk for the banking system? Cybersecurity

The main risk for the banking system? Cybersecurity

The interview. François-Louis Michaud. According to the Executive Director of EBA, digitalisation poses both cyber and money laundering risks: ‘Our goal is zero tolerance towards money laundering.’

The cybersecurity risk has become very high in the last six to seven years; it’s the greatest risk we face. Bankers now report it to us as their number one risk. After the severe financial crisis, cyberattacks have become a priority issue. Banks are very aware of this, and we, the supervisory authorities – the central banks – are dealing with it thoroughly.

These are the words of François-Louis Michaud, Executive Director of EBA, the European Banking Authority. In this exclusive interview on the eve of the AFME conference he is attending today in Frankfurt, Michaud stresses the importance of finding the right balance between risks and opportunities in the modernisation, digitalisation and technological transformation of the banking system.

The cost-to-income ratio is high, profitability is low; are European banks investing in IT and going digital?

We can’t generalise. There are different types of banks in Europe, different business models. It is difficult to make an assessment of the banking system as a whole. All European banks are definitely taking innovation and the technological transformation seriously and all of them are committed to it, but not all in the same way. Banks in northern Europe, for example, have moved more rapidly in the digitalisation process and their cost-to-income ratio has gone down; others have formed alliances and synergies with fintech companies specialised in niche markets, such as payment systems. Other banks have been quick to acquire services from fintech companies. This has been a positive development. Some are creating new digital banks in their countries; others prefer to transform their existing structures. In EBA’s view, new technologies have great potential for improving competitiveness and efficiency.

Competition with the fintech industry appears to be manageable, but what about big tech?

Big tech companies are not going to become actual banks but they are able to compete directly with the banks thanks to the huge pool of clients around the world. The relationship between banks and big tech is at a crossroads: banks should be concerned about competition from big tech companies, which are very ambitious. The European Digital Operational Resilience Act (DORA) puts banks and big tech on the same footing.

Have you seen any progress in banks’ artificial intelligence capabilities?

Artificial intelligence is very useful for banks, for taking decisions more quickly and for improving the way they use information. At EBA, we are also concerned about the collateral effects of AI, in the sense that it should not lead to ‘technological exclusion’. This is a conversation we are having with banks and at international level. In addition to financial stability, at EBA we are responsible for consumer protection and are analysing the side effects of artificial intelligence carefully.

EBA believes that digitalisation has great potential but that it also creates more risks, from cyberattacks to the laundering of dirty money.

Our goal is zero tolerance towards money laundering. Since 2018, we have been stepping up our efforts in Europe to clamp down on this phenomenon. Artificial intelligence and digitalisation help banks. In the past, it fell to individuals to make checks, involving a great deal of manual work to analyse clients’ portfolios and report suspicious cases. Nowadays, many of these steps are dealt with by technology, in which banks are investing substantially. However, the cybersecurity risk has increased. Bankers now report it to us as their number one risk.

Have cyberattacks in the banking sector increased since Russia invaded Ukraine?

No... At the moment, we have not noticed a major change globally; there has not been a significant increase in cyberattacks with the war in Ukraine. The level of alert remains very high though.

Meanwhile, banks have reduced their exposures and liabilities, and are more capitalised. Are they ready for major new challenges?

European banks and in particular Italian banks have indeed taken great steps to reduce NPLs and the results have been exceptional. They have practically halved their liabilities, thanks to a considerable effort. Italian banks have also made progress in modifying their business models, and have pursued a domestic consolidation that has been crucial for the efficiency of the banking system. Italian banks are moving in the right direction. More now needs to be done in terms of cross-border consolidation, not through M&A but using the European passport to distribute their products in Europe. This is the new frontier.

During the pandemic, banks were part of the solution. They were responsible for stabilising the economy and can continue to do so in the future, despite the great uncertainties about what is coming next. They are well equipped to navigate these choppy waters and are able to absorb these latest shocks. Banks have learned to respond to crises swiftly, how to move quickly to solve problems. They are strong, with the CET1 at around 15%, and the liquidity coverage ratio at 170%. If they continue to modernise, to simplify and improve their business models, and to cope with the green transition well, they will be able to go on to be part of crisis solutions in the future.

The interview was conducted by Isabella Bufacchi

Ilo Sole 24 Ore, 24 June 2022