Interview with Süddeutsche Zeitung

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Meike Schreiber und Markus Zydra on 4 and published on 17 February 2020 (part 1)

17 February 2020

Mr Enria, you have been Head of ECB Banking Supervision in Frankfurt for a year now, and before that you were in London. Do you find it boring here?

They cannot really be compared. London is quite probably one of the most dynamic cities in the world. Frankfurt does offer a very good quality of life and everywhere is within easy reach. We very much feel at home.

Do you sometimes go out in the evening?

Sometimes, to the brasserie just around the corner in Sachsenhausen and, occasionally, to a Japanese restaurant, which colleagues have actually warned me about.

Why?

Well, of all places, the restaurant is located on the ground floor of the Deutsche Bank building (he laughs) and banking supervisors are meant to keep a distance from the banks. But I still eat out there, hardly anyone knows me here anyway.

You already lived and worked as an ECB employee in Frankfurt once before for a few years from 1999 on. Do you have any examples of something typically German?

What really impressed me here is how seriously the Germans take their rules. My neighbours once checked whether I had sorted my rubbish properly. That was all new to me. The local authorities encouraged us to report any issues, for example if a street lamp had stopped working. I think it is good, because if you follow the rules, it makes life in society much easier. In Italy, people tend to feel the rules as more distant from their individual interests – for instance, car drivers often alert each other when the street police is checking respect of speed limits.

But Italy is a rules-based system.

Of course, but due to Italy’s past of foreign domination, the people have a rather sceptical attitude towards the powers that be, which could also be a healthy feature to protect individual freedom. And yet Italy and Germany actually have much in common. Their passion for culture, for example. Even the banking sectors are more similar than it is usually thought.

Explain what you mean by that.

In both countries there are numerous banks, with a long tradition of savings banks and cooperatives. Ownership by local governments was also a common trait of the banking sectors of the two countries for a long while. That is just the way it is, even if the Germans do have a tendency to stigmatise the Italian banking sector. And the Italians also raise concerns about the German banks, by the way.

Your appointment to become the most senior banking supervisor in Europe was rather controversial in Germany due to you being Italian. Did you take offence at this?

I have often been criticised, even in Italy, for taking certain decisions. No, I don’t take offence. It saddens me that sometimes people tend to pass judgment just on the basis of nationality. I just feel that I am an independent public servant who is working for the European project.

Where do these prejudices come from?

The banking union is a huge change project, so it is not unusual for there to be different national perspectives. The truth is that the Italian and the German banking sector are very heterogeneous. There are both weak and strong banks, and at the ECB, when making our assessments, we do not consider the country in which the bank has its headquarters.

Do you enjoy your job?

Banking supervision is a peculiar line of business. The public is only interested in us when there is a problem. Then it’s all our fault. When everything is running smoothly and the banking sector is stable, we are the ones that are interfering by imposing red tape. But the job is really great. Not many banking supervisors give up their jobs for something else. We are all really passionate about what we do. Once you’re in, you’re hooked.

Hooked? We are really put off just by looking at the streams of pages of Excel tables into which banks insert their data, for example for the annual stress test.

Well, that’s true of course. But the variety of practices and issues in the financial sector is really fascinating. There are some banks which are expanding in the world and others that are fighting for survival. And then there are others still which are used as a vehicle for criminal activities. This job is about more than just the technical issues. It’s about people and what makes them do certain things, what motivates them.

And how do you see things now? What is going wrong in the banking sector today, 12 years on from the onset of the financial crisis?

The banking sector is much stronger, also as a result of the regulatory reforms. But bank managers still think too much in terms of short term profits when conducting their business. This kind of behaviour also contributed to the last financial crisis. Financial institutions should pay more attention to their long-term risks. For instance, they should ask themselves whether they are sufficiently considering climate change in their business decisions and risk management practices.

Do you have any other concerns?

Weak governance is an area of concern. Poor data quality is a common issue at many banks: some are not even able to provide a full picture of their risk position across all subsidiaries and branches. And without good data bankers cannot take good decisions. Banks’ supervisory boards are often too weak in their oversight of the management. We will pay much closer attention to this as supervisors in the future.

Deutsche Bank gave millions in bonuses to its management board for 2019 despite the fact that the bank made high losses. How did you allow this to happen?

I cannot comment on an individual bank. But in general terms the issue is more complex. If a bank makes a huge profit based on an extremely risky business strategy, does that justify the bonus? Not really. We take action if the bonus system encourages bankers to take excessive risk. I’d much rather see a bank restructure itself, take fewer risks and incur a loss in the process, but pay reasonable bonuses to retain talented managers. As supervisors, we are not there to judge how a bank pays its people and the management board. What we can oversee is whether the bonus system gives the wrong incentives.

But isn’t there still a systemic problem with banks paying excessive bonuses? Surely, this puts even more pressure on banks already struggling in a low interest rate environment, doesn’t it?

There are, of course, situations that demand action on our part, for instance if bonuses are too high, which weakens the bank. Now, though, we have stricter rules in place than in most other places in the world, after the European Parliament capped bonuses relative to fixed salaries.

In response to the new directive, bankers immediately hiked their fixed salaries. Doesn’t this make the whole exercise rather counterproductive?

I wouldn’t say that. Banks cannot keep increasing their fixed salaries without limit. The number of seven-digit salaries in European banks has actually fallen.

The public are still sceptical about this, though. Do you perhaps need to explain your tasks better? ECB President, Christine Lagarde, wants to do just that in the area of monetary policy. Should you follow suit in banking supervision?

We are already making a serious effort to be transparent and explain our actions to the general public. Sometimes it’s not that easy. I think we need to be clear about one thing: we are a public authority and not an all-powerful Leviathan that can dictate everything from interest rates on deposits to salaries to staff. This is exactly what we cannot do. What we do need to do is get better at explaining our mandate. And our mandate is to make sure that banks do not take too many risks, which can jeopardise their stability.

You have recently mentioned Deutsche Bank explicitly, saying that supervisors contributed to the bank revising its business model. Is there going to be a public naming and shaming of banks in the future?

Well, I definitely do not want to name and shame banks…

…but maybe that’s exactly what’s needed?

Actually, it is always better not to mention any names. The words of a supervisor are easily extrapolated and taken out of context, and as supervisors we have delicate responsibilities.

Do you sometimes feel like a preacher delivering the same sermon over and over again? Maybe the banks ought to realise themselves that they need to manage costs and risks?

True, the banks and their shareholders need to make their own decisions when it comes to business models. But it is also clear that banks which do not react to challenging market conditions may end up causing a crisis, which is a problem for everyone: the market, savers, depositors. This is why it is not only our right, but our duty to speak out when a bank does not have a viable business model. We do get banks which, time and again, do not comply with our recommendations regarding cost efficiency, and keep burning capital. As banking supervisors, we need to be able to speak out against that.

Part 2 (published on 19 February 2020)