Interview with Expansión

Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Nicolás M. Sarriés of Expansión on 27 September and published on 16 October

I would like to ask you about the meeting you have just had with the Spanish banks. What is your impression following this meeting? Do you have any concerns? How do you see the current situation?

First of all, my visit to the Banco de España and my meeting with banks here was a “business-as-usual” visit to Spain. Every year I go to each of the 19 countries of the Single Supervisory Mechanism (SSM). I have two main objectives. The first is to spend time with the staff members of the national supervisory authorities. This is because they are working with me on European banking supervision. I want them to see me, so that I can tell them in person that I appreciate the work they are doing and the support that they give me. I thank them for the work they have done and explain the priorities for the coming months. It’s also great to get feedback on how we can improve the way in which we work together. The second objective is to see the banks in meetings organised by the banking associations. This is important because in Frankfurt we try to forget the nationality of the banks we supervise. We want to consider each bank individually in order to be completely fair and to avoid being biased by its nationality. But we also need to understand and get a feel for the situation of the banking system, so these national visits are truly important for me in that respect. I must say that the content of the meeting with the Spanish banks was nothing unusual: we discussed some news about when Basel III will be finalised, whether I am optimistic about the timeline, some questions about the review of the Capital Requirements Directive (CRD IV), and so on – topics we would expect to cover. Growth is back in Spain, like in many European countries, which means a more favourable environment for banks to address possible remaining issues. Spain has done a lot to learn the lessons from the crisis, and the return of growth will allow us to turn the page and move on, which is very good.

In general, do you think that Spanish banks are ready to meet their objectives under Pillar II?

A: Frankly, yes. Pillar II is about the specific characteristics of individual banks. So, we do not see banks as Spanish banks when we consider Pillar II – we see cooperative banks, global banks and small banks – in other words all types of situations with all kinds of quantitative and qualitative expectations. Because of a request last year by legislators, there are two types of Pillar II demand: Pillar II requirements and Pillar II guidance. And yes, I do expect Spanish banks to be able to meet Pillar II requirements, and at the same time comply with the Pillar II guidance, whether they are qualitative or quantitative.

You mentioned there was some concern regarding the lack of mergers and acquisitions in the sector. Do you think we will soon see pan-European institutions?

I hope we will soon start to see them. I think the markets will consider this as a sign that we are now in a single jurisdiction and that we are paving the way for these kinds of mergers. I truly think that now is the right time. There are signs that things are changing, which is good. There have been some mergers, principally, but not exclusively, domestic mergers, such as CaixaBank buying BPI in Portugal, although it is true that these countries are close to one another.

An Iberian merger.

Exactly. I sense that we will indeed see cross-border mergers that would not have been considered before the SSM; they have suddenly become much easier and more convenient because banking union exists.

From next year onwards, the European banking sector will have a new accounting standard – IFRS9. Is it expected to have a major impact? Which countries will be most affected?

To be honest, at present it is difficult to assess its impact because we do not know what the final legislative framework will be. What is certain is that accounting systems will change, but the consequences for the level of capital to be held by banks is still unclear. We are in favour of a transitional phase to cushion the initial shock. However, we don’t know what the European Commission will propose or what the legislator will decide. But they need to move quickly, because if the rules are not clarified, we will not be able to grant exemptions. And without exemptions, the whole impact will have to be absorbed immediately, which, in my view, could be significant. That is why we favour a transitional period to cushion the initial impact.

Beyond this, it is a new regime that has to be implemented. One of the lessons learned from the crisis, and mandated by the G20, is that expected losses must be adequately provisioned, not just the incurred losses. Do we expect a major impact? Well, let’s leave to one side the timetable, which is currently unknown to us. In Spain, the Banco de España has drawn up a circular for implementing IFRS9, which offers banks plenty of useful guidance. Also, the concept of provisioning for expected losses is not unusual for the Spanish banking sector given the former “dynamic provisioning” used by banks here, so banks should not be too surprised. In fact, with the exception of countries like Spain, which already have experience with provisioning for expected losses, we do not anticipate much difference in impact across countries. But we do expect there to be a difference in impact for banks that use the standardised approach for calculating their capital requirements compared with those that use their own internal models. When banks use their own models, they are obliged to calculate expected losses and then compare those expected losses with their provisions. Where the provisions are not sufficient to cover the expected losses, banks have to deduct the difference from their capital. However, the expected loss calculation for the models approach is for expected losses within a time frame of 12 months. So, while it is not exactly the same calculation, it is the same concept.

We are monitoring the readiness of banks for IFRS9 – some are more prepared than others. Size is also important: for large banks, the impact is greater and they have prepared themselves earlier, or at least most of them have. We have carried out a thematic review to gain a more detailed picture of the banking sector’s preparations. We have good reason to believe they are well prepared to deal with the changes in accounting regulation, assuming, of course, that there is a phase-in period for the prudential consequences, which is an important point.

Following the resolution of Banco Popular, problems emerged regarding supervision which caused some debate in Spain. Could you explain to the public how it is possible for a bank which has passed all the stress tests to have problems and to suddenly be close to bankruptcy, leading to it having to be resolved?

It was not sudden. I should like to underline several points here. First, when a bank is failing, it is not necessarily owing to a problem with its supervision. And it should be clear that it is not the aim of supervisors to avoid the failure of any bank. If bankers make bad decisions and take wrong turns, including not listening enough to what their bank supervisors are asking of them, banks can fail. It is always a painful time for the bank, the shareholders and investors, the country and, indeed, the supervisors too. As supervisors, we know for sure that we will be criticised even when great efforts are made to avoid a bank failure. But, to repeat, the aim is not to save all banks. Second, it is not right to say that the bank passed the European Banking Authority (EBA) stress tests reasonably well. Banco Popular performed the third worst out of the SSM banks when the results were published in July 2016. A great deal of public information was available at the time which showed that the bank had to make considerable efforts to boost its solvency. Then, the bank disappointed the markets with its 2016 accounts, making it clear again that the numbers had to improve. There were also several credit rating downgrades by the rating agencies during the first half of 2017. So, it was not unexpected.

I ask because this is what those affected and their representatives are suggesting.

Yes, so thank you for giving me the opportunity to respond. I understand that it can be seen this way. But, each of these elements should have been taken as a signal to move faster with key changes. Doing too little, too late may trigger a failure.

As supervisor, what lessons have you learned from the Banco Popular crisis? There is talk of a lack of early intervention measures.

Well, it was the first time that European banking supervision took a decision that a bank was failing or likely to fail. From my perspective, the collaboration that took place with all of the institutions involved – the European Commission, the Single Resolution Board (SRB) and the Banco de España in its capacity as both supervisory and resolution authority – was extremely good and very effective. Moreover, this legal institutional framework and the Bank Resolution and Recovery Directive (BRRD) passed the test in allowing the decision to be taken without causing problems on the markets.

Regarding the early intervention measures that you mention, there is a difficulty with those measures in that the same measures can be taken either under CRD IV or under the BRRD. And there is a difference between the two. If you take these measures in accordance with the BRRD, it acts as a strong warning that, if bankers do not act immediately, the bank may end up in resolution or liquidation. If you apply early intervention measures under the supervisory rules (CRD IV), the message is not so strong: it is rather that “the situation of the bank needs to be strengthened”. As supervisors, we have to be proportionate and we need to employ the instruments that enable us, using the least intrusive and most proportionate tools, to achieve the desirable outcome. And it is always more proportionate to use CRD IV rather than the BRRD; but sometimes we need to use the BRRD. So how and when to apply one or the other will be made clearer by the European Commission since the outcome of using these tools differs under the two pieces of legislation. For the rest, I would say that it worked reasonably well, or even, pretty well.

What we have learned is that we are probably going to need a moratorium for situations such as these, in which there is a rapid deterioration in liquidity and where we are not able to declare that a bank is failing or likely to fail on a Friday, so as to give the SRB a full weekend to carry out its work. It is a bit difficult to imagine a shorter period of time in which a resolution can be done. We were lucky in Banco Popular’s case, because a buyer was available. If there hadn’t been one, the process would have been more complicated. If there is the possibility of a run on deposits, it is better to have the power to prevent it from happening, because all depositors should be treated equally in the event that they look to withdraw their funds, and there is a risk that not all creditors can be paid. We should have the option to freeze the situation so that no one depositor is treated better or worse than any other. With a moratorium we would also have time to wait until a weekend. This would be done only when necessary. But it falls to the legislator to decide if we need to have this tool or not.

In any case, this type of moratorium would only be for a matter of a few days.

Absolutely. Work needs to be done to understand how this could work best. The rule could exist, but equally depositors have a right to have their money reimbursed within a fixed period of time, so there would be a maximum duration.

Some months ago, the Association of Inspectors sent a letter complaining about the European system of supervision. It also raised serious concerns about the report by Deloitte on Popular. What is your view on this?

I won’t comment at all on individual complaints, whatever they may be. As for the Deloitte report, that was prepared for my colleagues at the SRB. So I am not in a position to comment on it.

Spanish banks complain about regulatory restrictions. Do you think that it’s time to turn down the regulatory pressure?

Absolutely not. I would even say the opposite and for all European banks, not just Spanish ones. Growth has returned to Europe. Banks need to use this improved situation to clean up their balance sheets as fast as they can. They must be ambitious, but also realistic. Now is a good time for banks to clean up their balance sheets, and I have been a supervisor of banks for too long to think that this is going to happen without supervisors applying some pressure.

The banks are always talking about fintech and its arrival. Does this worry you too in your capacity as supervisor? Are the banks ready for these new competitors?

There is no doubt that the world is changing faster and faster. Fintech is part of this reality. We supervise banks. So, if some fintechs want to be banks, which appears to be the case, we will make our assessment to grant or refuse them a banking licence based on whether they fulfil the same requirements that apply to banks. There may be different ways of conforming to those requirements, but they will have the same risks and hence the same status and supervisory treatment as banks. In fact, on our website we have published a draft guide for public consultation aimed at entities with a fintech business model which are considering applying for a banking licence. The consultation period runs until 2 November, so interested parties can provide us with their comments and observations until then. Apart from licencing, there are other issues associated with the existence of fintechs, one of which is competition with the banks. Banks need to rethink their business models and reassess the sustainability of those models in a world in which new competitors will likely eat into their profits, in the area of payments services, for example. This will form part of the new environment and, of course, we will take this into account. In addition, some banks are opting to buy fintech firms, so that they can offer their customers all the digital services, or they develop their own fintech in-house. All of these solutions are possible, but digitalisation is here and it’s here to stay.

Do you think the ECB has sufficient powers to deal with this new reality?

Maybe not yet on our own at the ECB, but together with the national supervisory authorities, many of which have teams of IT specialists (and the Banco de España is an example of this), yes I think we have reasonably adequate resources. With regard to the ECB’s powers, I think that we need people who can undertake a sound assessment and have a good understanding of the situation, and of the risks associated with digitalisation, for example cybercrime. However, I don’t think a few laws written down on a piece of paper would be very useful. I think that we should use the tools of general supervisory guidance and expectations, because fintech is an ever-changing and fast-moving world.

It has been mentioned that Luis de Guindos is a candidate for the Vice-Presidency of the ECB. Do you think he’s a good candidate?

I have no opinion on this. It would be totally inappropriate. It’s a decision for the EU Council.

The ECB is reviewing banks’ business models. It has also subjected the banks to a stress test this year ...

From the very beginning we have stressed that banks must reassess the sustainability of their business models in the light of the fact that they are not profitable enough in Europe. A number of European banks are not covering the cost of their capital, which is not sustainable in the long term. There are also falling profits owing to non-performing assets. We are asking banks to reassess their business models from the point of view of profitability, and this is something which has been going on quite seriously for two or three years. On the subject of stress tests, next year we have an EBA stress test, and this year we did not, so we chose to carry out a hypothetical interest rate stress test using the Basel Committee’s guidance on how to do such a stress test. Interest rates will not remain unchanged forever, and banks have to prepare for the next cycle. We do not know when this will happen, but banks will need to be prepared. They must be prepared for fintech as well as interest rates.

Do you think that it’s better for banks to accept that rates will remain low for a while?

Banks can assume whatever they want; that is not up to me. I am at the ECB, albeit in the supervisory arm. We have quite robust Chinese walls (we are even in a separate building), and that means that I don’t know what my colleagues in monetary policy are doing. Remember, this is only a hypothetical exercise. Following the previous stress tests on credit risk, we thought it appropriate to carry out interest rate stress tests, and that’s that.

Are banks prepared for a longer period with rates as they are?

All we can say is that they are reasonably prepared for possible changes, or lack of changes. Real life will show whether that is enough.

Do Spanish banks have any particular weakness in terms of their business models?

It’s impossible to generalise: after all, what does a global systemic bank (Global SIFI) like Santander have in common with Sabadell or Cajamar? In Frankfurt, we try to look at each bank individually, because that’s how it should be done. On the whole, the country has gone through a major crisis, as have other countries, and it has worked hard to remedy the situation. Now, banks are in a good position to benefit from the current return to economic growth.

Do you think that Spanish banks will be profitable enough in the short to medium term? Do they have what it takes to do that?

Like all banks, they have positive points. And like all retail banks they are affected by low interest rates. But they have been more successful than others in reducing operating costs and achieving a good balance between costs and revenue, setting them up for improved profitability in coming years.

The SSM is now three years old. What is your assessment thus far?

The first year was not about supervision, but rather about carrying out an overall assessment of the banks and at the same time recruiting our staff for banking supervision. I think that we have achieved a lot; much more than I had hoped. At the same time, I must admit that there is much more work to do than I expected initially. We have found that some countries have been hit harder by the crisis than we expected. However, everyone at the national supervisory authorities and the ECB has worked very hard to improve the situation and we have achieved a lot, including in cooperation with our colleagues in the SRM. Despite the fact that there is still a lot to do, we have made significant strides in terms of the two pillars of banking union. It’s good to reiterate that from time to time in order to give us the strength to continue the work that needs to be done in the coming years, so that we have a safe and sound European banking system that serves the European economy well.