When yields climb, bond prices fall - and that can ripple through bank balance sheets. Francois-Louis Michaud, who chairs the European Banking Authority, said supervisors have increased monitoring of banks' government debt portfolios as some core European yields sit at multiyear highs. "That is what supervisors are doing," he told an interviewer at the EBA's Paris headquarters. So far, he views the situation as "contained," noting that higher net interest income from bonds is "largely offsetting" the drop in bond prices for the economic value of banks' equity. As he put it, "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."
The EBA's risk dashboard shows that by the end of last year, European banks were carrying over €4 trillion of sovereign bonds, which amounted to roughly 13% of their assets. Current rules allow banks to hold European Union government debt without capital backing. Even so, under the EU's banking competitiveness package, charges are proposed for concentrated exposures, aiming to prevent lenders from being dragged down by troubles in their home sovereign. Michaud cautioned that accounting treatment does not erase risk: "Technical treatment is one thing," he said, adding "the way you manage your entire balance sheet is another."
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Michaud said supervisors and banks are discussing how exposed lenders are to moves in sovereign yields, how those exposures are being managed and hedged, and what policy tools might be used. He declined to detail the tools. After serving six years as the authority's executive director, he took over as EBA chair in mid-April.
Worried about an AI-fueled market stumble? Michaud said any potential hit to European banks from a crash linked to artificial intelligence also appears "contained." It is part of a broader exposure to the ICT sector, which stands at 4% for EU banks, a level that "gives a bit of comfort." Still, he said the topic is getting "a lot of attention" from the EBA's board of national supervisors and that "after competitiveness, it's probably the second-most discussed topic at the moment in our groups." For your portfolio, the read-through is that supervisors are pressure testing both rate sensitivity and tech-linked risks inside banks - and, for now, the numbers look manageable.
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