Fintech
European banking: regulatory shift ensures social factors increasingly credit relevant
Social issues as much as environmental ones are increasingly important for assessing credit risk in the European banking sector as legislators and regulators set tougher rules on related disclosure and performance, says Scope Ratings.
“Regardless of one’s views on the appropriateness of incorporating ESG factors in credit and investment decisions, we argue that once regulators take a stance on these matters, it becomes highly relevant,” says Pauline Lambert, analyst at Scope Ratings.
“Indeed, regulatory initiatives all point to the growing importance of the ‘S’ in ESG when evaluating the creditworthiness of banks,” Lambert says. Three initiatives stand out: increasing diversity, ensuring customers have access to cash, and improving sustainability-related disclosure.
“Take the example of the UK where the Bank of England and the UK Financial Conduct Authority are holding a consultation on improving diversity and inclusion in the financial sector. They highlight their willingness to use regulatory powers where firms fail to meet minimum expectations,” says Lambert.
Access to cash is also an issue gaining regulatory attention with financial consequences for the European banking sector.
“We have previously highlighted the costs, including the potential social and reputational risks of closing bank branches, but we now see a further risk as governments move to protect access to cash, meaning that banks are likely to face more challenges in reducing their branch networks,” says Lambert.
Cash remains an important payment method for many, including small businesses, even if its role is diminishing. In an ECB survey on consumer payment attitudes, more than 50% of consumers in the euro area still consider it to be very important or important to have the option to pay with cash.
Developments in Sweden are telling. Since January, legislation requires the six largest Swedish banks to provide cash withdrawal and deposit services throughout the country even though only 9% of Swedes used cash in transactions last year, according to the 2021 Worldpay Global Payments Report. As part of a broader review which also looked at contingency planning in the payments system, authorities concluded that cash was considered legal tender and therefore there was a duty to ensure reasonable access.
“Other countries may well agree with Sweden that a completely cashless society would be vulnerable while cash remains crucial for some such as those living in remote areas and the elderly,” says Lambert.
Finally, tougher rules on disclosure are bearing down on banks in Europe. In addition to the Non-Financial Reporting Directive (NFRD) and Sustainable Finance Disclosure Regulation (SFDR) already in force, and the proposed Corporate Sustainability Reporting Directive (CSRD), the EU published a draft “social taxonomy” in July. In a similar manner to the Taxonomy Regulation which focuses on environmental concerns, the “social taxonomy” would define socially sustainable sectors and activities to prevent social washing.