Interview with Ta Nea

Interview with Luis de Guindos, Vice-President of the ECB, conducted by Leonidas Stergiou on 21 May 2025

27 May 2025

What is the key message from the latest issue of the ECB’s Financial Stability Review?

Uncertainty in the global economy has increased significantly since the last Financial Stability Review in November 2024, mainly because of the abrupt change in US tariff policy. Given this level of uncertainty, we see three main risks to financial stability.

First, market valuations are very high and are now pricing in a benign scenario with no recession, lower inflation and lower interest rates. High valuations and high uncertainty could give rise to sharp market corrections – as we saw after the US tariff announcements on 2 April – and adjustments could become disorderly. Second, the heightened uncertainty is already affecting growth, which could elevate credit risks for banks and non-banks. The European Commission’s growth forecasts have been revised downwards for 2025 and 2026, businesses are postponing investments and households are delaying major purchases. Third, fiscal pressures are on the rise owing to higher defence spending in a low-growth environment. This could affect sovereign bond yields and raise concerns about sovereign debt sustainability in some countries.

How do trade tensions with the United States affect the economy?

We do not know what the final outcome of the ongoing trade negotiations will be, but they have certainly created uncertainty and volatility. They are affecting investment, weakening household confidence and reducing the growth prospects of the European economy. The trade negotiations are still ongoing but, ultimately, the level of tariffs is likely to be higher than it was before the start of the new US Administration. And we shouldn’t only focus on bilateral tariffs between the United States and the EU – we also need to look at global trade patterns and disruptions. If China redirects its exports to Europe, for example, the impact will be significant.

What are the risks from non-banks?

The non-bank financial sector is a very broad term that covers investment funds, insurance companies, pension funds and other financial intermediaries. Non-banks have weathered recent market disruptions well overall. But, in such an uncertain environment, with trade tensions increasing market volatility and weighing on asset quality, they could face higher valuation losses and more frequent margin calls.

Hedge funds are our main concern here. First, because of liquidity risk: if redemptions increase, they might not have enough liquid assets to meet them. Second, because they can be extremely leveraged – not only in the traditional sense but also through derivatives – there is a risk that they might need to fire-sell assets and unwind their leverage. These factors may increase pressure on the market and exacerbate the risk of contagion in the event of a shock.

The non-bank sector has grown significantly over the past few years and is less supervised than the banking sector. This is why we need an effective policy framework that improves the sector’s resilience and levels the playing field across Europe.

Is the supervisory framework fair for small and medium-sized banks in the euro area?

We think there is scope to simplify European banking regulation and reporting frameworks, in line with the initiatives of the European Commission. We have therefore created a task force within the Eurosystem to develop proposals on how to simplify the regulatory framework for European banks. Once approved by the Governing Council, these proposals will be sent to the European legislators for their consideration.

The group is going to look at four main areas. First, how the capital structure could be made simpler and easier to understand for investors. Second, the remaining steps in the implementation of Basel III, considering what will be decided in other countries, like the United States. If the United States pursues a more lenient approach, the EU could be put at a competitive disadvantage. Third, simplifying the extensive reporting obligations that banks face, with a view to avoiding overlaps and reducing the administrative burden. And finally, simplifying our own supervisory framework. Our banking supervision arm has already taken several steps in this area, for example by streamlining our annual assessment of banks’ risk profiles.

In any case, our recommendations will not undermine resilience, and banks’ capital levels should not be reduced. The aim is to make the regulatory and reporting frameworks simpler and easier to follow, without reducing banks’ solvency.

In the Financial Stability Review, you mention the high deposit franchise value of Greek banks. Is this an advantage or a risk?

Banks with a stable and strong deposit base are more resilient. By providing steady, low-cost funding, strong deposit franchises are a source of bank profitability. Greek banks are a case in point and so have a comparative advantage over banks that rely more on market financing.

What is currently the main challenge for the Greek economy?

Greece has made remarkable progress since the sovereign debt crisis ten years ago. Greek bond yields are now at historically low levels, banks are solvent and robust and the economy is growing faster than the euro area average. The labour market has also strengthened, with unemployment levels dropping significantly. This has been acknowledged by markets, rating agencies and institutions, including the European Commission and the ECB.

To maintain this momentum, the main challenge at present is to enhance economic productivity by investing in education, innovation and infrastructure. This will help to boost wages and improve living standards in a sustainable manner and will support Greece in maintaining its strong economic performance in the medium term.