Interview with LETA

Interview of Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Airisa Ādamsone and published on 23 March 2017

What are the main challenges in the field of supervision?

The very first objective was to establish a new supervisory institution within a short time frame. It was formed in cooperation with 19 different countries, which was quite a challenge.

In November 2014 the Single Supervisory Mechanism took over the supervision of the significant banks in the euro area. The first banking supervision staff members started to work for the ECB at the beginning of the year and on 2 January 2014, when I started, we were a small team. By November 2014, when the Single Supervisory Mechanism took over the supervision of the significant banks in the euro area, the number of staff members, including providers of support services, came to close to 1,000.

The Single Supervisory Mechanism was established in a period, which was characterised by the need to strengthen banks, to address issues such as bank profitability and non-performing exposures.

Banking supervision is achieved in cooperation with the national supervisory authorities of the participating countries. How is the cooperation developing?

Very smoothly. Supervision of the 126 banking groups, comprising about 1,200 banks, which are subject to direct supervision by the ECB, is undertaken by Joint Supervisory Teams made up of staff members from the ECB and staff members from the national competent authorities. The supervisory teams for the biggest banks consist of as many as nine people based in Frankfurt and then many more staff members of the supervisory authorities of the respective countries.

The ECB staff members make up a small percentage of each Joint Supervisory Team. And so we work closely together with our national colleagues – we cannot do everything from Frankfurt. In our everyday work we use a single language – English. This is also a challenge. And then banks have the right to use their own language in their communications with us, so we also use translators where we need to.

Isn't the decision-making structure, consisting of several layers, slowing down the process?

It is certainly the case that the structure can be a complex one. For example, no options for the delegation of tasks were available, so each decision, even the most minor one, had to be made at the level of the Supervisory Board – which is at a much higher level than was the case before the introduction of the Single Supervisory Mechanism.

The legislators did a very good job to facilitate the establishment of the SSM so effectively – but they could not anticipate the future needs of the SSM. In the next few months, the text of the regulation of the Single Supervisory Mechanism is being reviewed and so there is the possibility to address this and other issues then. Still, despite the complexity of the structure and the need to take a large number of decisions, the Single Supervisory Mechanism is working very well and cooperation with the national supervisors of the euro area countries has been very successful too. I would like to commend our Latvian colleagues; Latvia has a very dynamic team.

How about cooperation with financial market supervisory authorities in countries outside the euro area, for example Sweden, where parent companies of banks directly supervised in Latvia by the ECB are located?

Because of the establishment of the SSM, cooperation has improved a lot. The dialogue with banking supervisors in Sweden and also in other countries outside the euro area is improving, since the Single Supervisory Mechanism benefits from the trust and reputation of the ECB. In our engagements and dialogue, we are stronger together than any one national supervisor can be. There is the strength of the ECB and 19 countries behind us. That is a key strength of the SSM.

We are the largest global banking supervisor in terms of the amount of supervised assets. We cooperate with the US, United Kingdom, and with supervisors in other countries whose banks are represented in the euro area.

The euro area countries face different challenges. What are the differences between Latvia and the other Baltic States?

There is a single euro area jurisdiction, but the national banking systems are different – they have a different history and different post-crisis experiences. Some are at different stages of repair following the crisis. For example, in some countries there is a high proportion of non-performing loans, while in other countries there is a very low rate of non-performing loans.

The economies of the Baltic States are small and open, which is a strength and a risk factor at the same time, because the Baltic States depend on the growth and prosperity of their business partner countries.

The profitability level of the banks we supervise in Latvia is higher than the European average, and the amount of non-performing loans is lower than the European average.

Do you see any special risks or vulnerabilities for the banking system of Latvia caused by fact that there are two types of banks — some working with domestic customers and others concentrating on foreign customers?

Each bank has its own opportunities, strengths and weaknesses. There is no such thing as a universally good risk profile or good business model in terms of risks. Therefore the strengths, weaknesses and opportunities are analysed at the level of each individual bank, subject to supervision by the Single Supervisory Mechanism. The supervisor needs to make sure that each bank identifies its own potential risks and problems, and works accordingly in order to ensure it maintains operations that are strong and safe.

Local banking supervisors and other institutions are responsible for the prevention of money laundering. Still, the risks of money laundering and financing of terrorism are cross-border risks. Shouldn't these matters be supervised centrally?

This is a decision for politicians and legislators to make. They could take the view that there is a need for a single authority to coordinate the work already done by organisations and local authorities responsible for the prevention of money laundering. Anti-money laundering is important work and needs dedicated resources. In my opinion, the Single Supervisory Mechanism cannot take on such a responsibility, because we already have many tasks which require our full attention. Moreover, we already work closely with the 19 national competent authorities that undertake banking supervision for the countries of the euro area. And in addition, as is the case in Latvia, if the national competent authority is not a national central bank (NCB), the representative of the competent authority can be accompanied to Supervisory Board meetings by a representative from their NCB. As anti-money laundering is not necessarily located in the NCAs or NCBs, it would mean having additional “partners” within the SSM, which would add complexity.

However, a decision could be made at the European level to enhance international cooperation or to establish a central institution within the euro area which would undertake the role of coordinator of matters related to the prevention of money laundering, and implement best practices. It is the responsibility of the legislator to decide whether such cooperation is necessary.

Are there any staff members of the Single Supervisory Mechanism from Latvia?

Yes. On top of the colleagues from the national competent authorities, at the ECB we have staff members from 28 European countries. Variety is an excellent thing.

A topical matter in the Baltic States is the planned merger of Norway’s DNB and Nordea of Sweden. If the deal is approved, it will create the second biggest bank in the Baltic States. How will this deal change banking supervision in the Baltics and in Latvia?

I would not comment on individual banks.

Generally speaking, there is a need for banks to merge in Europe. Some countries have too many banks. Part of the problem in respect of bank profitability is directly related to the overcapacity of banking services. Meanwhile, one should note that mergers must be justified and the resulting bank must be strong from day one. It is not enough for a bank to promise to be strong in several years’ time. When the ECB receives a request to allow banks to merge, we evaluate it very seriously. A successful merger helps to improve the banking system as a whole and the position of the merged banks too. Generally speaking, such deals would be subject to conditions in order to ensure that the bank which results from the merger would be strong and solid.

Of course, not all banks need to merge. Some banks are very large, and we do not want to promote a situation in which only several large banks are present in the market. There is room for all kinds of business models and bank sizes. But it is true that there is some level of overcapacity and some banks could take measures in order to improve their level of profitability.

Do you see any merger opportunities in the market, are there any tendencies?

Well, for example, we have seen mergers and acquisitions in Italy’s banking sector, which is a country where there are many banks. I think that some other deals will follow.

Market participants will see the success of the Single Supervisory Mechanism in cross-border mergers. This would be a positive step. I am convinced it will happen.

What are the main challenges of the banking sector in the medium term? We are living in times of low interest rates, and financial technology companies are starting to compete with banks.

The world is changing and banks will have to change as well. Each bank will have to think about the business model it will need in order to ensure the sustainability of its operations. A sustainable business model means that a bank must be well capitalised, have adequate liquidity and sustainable profitability.

Banks must use the development opportunities offered, for example, by digitalisation. The profitability level of Latvia’s banks can be partly attributed to their very good ability to use digital technologies and to provide digital banking services to customers. A significant proportion of customers wish to perform banking operations in new, digital formats.

A significant challenge is profitability. Currently there are banks in the market which are not earning the cost of their capital. Such situations cannot last forever. It is possible for a few years, while the consequences of the crisis are tackled, while delayed credit payments are recovered, but in the long run banks must ensure an adequate return on equity.