Interview with Expansión, Handelsblatt, Il Sole 24 Ore, Les Echos

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Andrés Stumpf, Yasmin Osman, Edouard Lederer, Isabella Bufacchi

29 November 2023

We discussed many times that the German banking sector is less profitable than other banking markets in Europe. During your tenure, would you say that German banks have improved in recent years or are they still laggards?

There has been an improvement in general, but low profitability has been a major headache for all European banks. The average European bank has not been earning its cost of equity for a long while. It is true that German banks have been on the lower end of the spectrum, also within the euro area banking sector, and this has remained the case to some extent. They have improved recently. The return on equity is now around 6% but still below the euro area average, which is around 10%. So the profitability is still lagging behind a bit. Improvements have been materialising as a result of course of the change in the interest rate environment.

What has driven the different impact in different countries of the shift in the interest rate environment has mainly been the relevance of the fixed-rate contracts and the pass-through to depositors. In this area, Germany is more or less average in the euro area, so it has maintained that position. Cost efficiency is also an important issue for the German banking sector. It has improved but the cost-to-income ratio is still above the euro area average. So there is still a bit more to be done.

With regard to that, do you think it’s a good idea that German banks are a little bit reluctant to give more interest to their customers?

I don’t see it. As I said, German banks are around euro area average, also on the pass-through. It was to be expected – banks, having avoided passing through the negative interest rates to customers totally (and they passed them through later), when the interest rate environment was changing and interest rates were increasing, the pass-through of more positive interest rates would have been somewhat delayed, too. Now we see that, in general, there is a significant pass-through taking place for corporate customers, corporate depositors. We start seeing a transition from sight deposits to term deposits – also for households, which is the way the pass-through occurs in many cases. But it is true that in this hiking cycle, the pass-through rate of the benefits of higher interest rates to depositors is not proceeding as in previous hiking cycles. It is much more contained. We expect this to accelerate now because we have seen that this is also linked to the excess reserves that the banks have. So the banks that have less excess reserves, that have already been delaying the reimbursement of the targeted longer-term refinancing operations (TLTROs), are the ones that have been passing through to the depositors the most. So, as the excess reserves are reduced, we expect competition on deposits to increase and the pass-through to become stronger across the euro area.

We jump to Italy now. Italian banks have done a great deal. They reduced the non-performing loans ratio and also on the cost-to-income ratio they are in a good position, and they are profitable. We've seen the main banks’ huge profits. So, what would you say the challenges for the Italian banks are now, given that they could have some specific Italian challenges? For example the transfer of Italian sovereign spread to bank bonds, or the concentration of sovereign bonds in banks’ balance sheet, or on the funding side the competition from Italian government bonds that are now very popular with retail. So there could be some specific challenges to Italian banks.

Well, you're right. First of all, the improvement in the Italian banking sector in terms of capital ratios and resilience, and asset quality in particular, has been very strong. So now they are in the same ballpark as the average in the banking union. You're right that if you go back to the difficult periods of the past, there were problems with lower capital positions, much worse asset quality and sovereign exposures with the widening of spreads during the sovereign debt crisis. So the first two issues have been basically addressed in a good way. Also on the sovereign exposures, I would say that there has been a reduction in concentration and better hedging for these exposures. But still, in the exercise we did during the summer on unrealised losses in securities portfolios, Italian banks reported a higher amount of unrealised losses than other banks across the banking union. So that's an area of attention, not a huge issue, because for the European banks in general, and also for the Italian banks, the overall impact is not a source of great concern. Of course, it is important that banks manage interest rate risk and credit spread risk appropriately, also stressing their securities portfolios and paying attention to unrealised losses. On the funding side, you're right that funding is an issue in general. Funding risk is an issue for all euro area banks in a changing interest rate environment, and we are paying a lot of attention as supervisors to these profiles. So the increase in funding costs that might also reflect the sovereign spreads to some extent is something that banks need to factor into their funding plans, which we are looking into very carefully.

For Spain, the issue of governance has been at the forefront of the Spanish banking system. During your mandate, the ECB has pushed for the elimination of the position of executive presidents, which was well established in Spain, along with other issues, such as the lack of independent directors and even legal proceedings against some entities. So, are you satisfied with your work in this field, and the banks’ response?

The short answer is yes. Executive chairs are a solution which is not forbidden under European law, although there are some conditions that might be attached to it and the Spanish implementation of the European directives confirms the possibility of relying on this formula. Still, there are some concerns. We don't see this as a best practice. The concerns are mainly the excessive concentration of power in a single person in the hierarchy of the bank; the blurred distinction of responsibilities between chair and CEO, which can also mean a blurred distinction between supervisory and managerial functions on the board; and the fact that the checks and balances, and, on the board, the ability of the independent directors to challenge the management, is of course hampered if the chair is also the executive of the bank. So we have advised banks on a case-by-case basis to introduce remediations that deal with these three issues. And there has been progress in this respect. We also notice with satisfaction that some banks have decided to move forward to a non-executive chair, and we of course strongly support this transition. And the role of independent directors is also an important element. The number and the role of independent directors is another area in terms of our governance reviews which has been on our radar.

French banks have not enjoyed the rate hike as much as their counterparts in Europe. That's mainly because of the fixed-rate portfolios. But what is your take on that fixed-rate model? Is that in a way a model because it gives you more stability in terms of risk or can we see it as a problem right now for banks because they lack the profitability their counterparts have already experienced?

Let me say up front – there is no model which is preferable in terms of financial stability. Both the variable-rate contracts and fixed-rate contracts can – if interest rate risk is properly managed – provide a viable business solution for banks. And we have different combinations of the two types of contracts across banks in our countries. Of course, when you have a predominance of fixed-interest loans, mortgages in particular on the asset side, it is clear that during a period of increasing interest rates, interest rate risk becomes more prominent. It's also true that when interest rates declined or went into negative territory, the fixed interest on the assets was actually a hedging element for the banks. So, it was a positive. In general, again, the key point is to properly manage interest rate risk in the banking book. With reference to the French banks, we also have to say that there are some peculiarities. There is legislation on usury rates, which has been particularly impactful in a moment of rapid increase in the interest rates. And there is the important role that the Livret A plays in the remuneration of deposits, which means, to some extent, that there's been a higher pass-through because of the Livret A and the lower benefits on the asset side because of the fixed-interest contracts. So it is true that French banks have not benefited as much as other banks from the increase in the interest rates. But I understand that this process is now coming to a conclusion in terms of the adjustment and so we don't see any additional adverse effects to come.

You mentioned several times, I think last time in your London speech, that you did everything so that there could be more cross-border mergers and that you think it's a good idea. Nevertheless, it doesn't happen, so why are you urging banks so much to merge? Is it your role as supervisor to tell the private sector what to do?

No. Of course, as a supervisor I tend to tell them what not to do. That’s my main task. On consolidation, the issue appeared on my radar when I joined five years ago, because the industry was complaining that they would have needed to consolidate but couldn't because of the additional capital requirements that the ECB would have charged in case of consolidation. My first role was to clear up this misperception and to make it clear to the banks that they would not be penalised for mergers from the prudential point of view. I also said that I saw the positives of mergers in a situation of low interest rates and low profitability, where banks had a significant need to refocus their business models. And of course, a merger is the most radical way in which you actually have an opportunity to refocus your business model. We have not seen a lot of full-blown mergers between banks and when we've seen some, they've been mainly national. But we have seen quite a lot of acquisitions of business lines: in asset management, custody business, leasing, structured equity, payments platforms. These, in my view, have been important to enable some banks to sell areas of business that they didn't find profitable and others to buy these lines of business to achieve scale and become more profitable. So this has been in my view an important element in improving the sustainability of business models of our banks. And that's why as a supervisor, to some extent I saw the benefits of mergers, although of course the final decision is in the hands of the banks. On the cross-border aspect, my message has always been: no constraints from our side. Now that we have the banking union, there is a single authority that will be responsible for both the parent and the subsidiary within the banking union, within the euro area. So, we will be neutral. For us the jurisdiction is the banking union. So whatever happens within the banking union is like a domestic merger. We would not have any national bias in the way we assess mergers. I also see, from the policy perspective, the benefit of having banks which are more diversified across Member States – if there is a shock hitting one Member State, they can compensate the losses in that country with the profits they realise in another country. So, in terms of stability, they can help absorb the shock. It’s what economists call private risk sharing. It’s the fact that banks can help with spreading and stabilising the economy in case of a shock hitting a particular part of the market. That’s the main benefit I see in cross-border mergers. The other is that when you have a crisis – we had few, luckily enough – but in the ones we had, when you try to find a buyer for the failing bank, now basically in all cases we had to search for domestic buyers. We had Popular with Santander, for Sberbank we had Postbank in Croatia and Nova Ljubljanska in Slovenia buying the local subsidiary. Ideally, if you have a more integrated market and more openness to cross-border mergers, you would have a much wider set of banks that might be interested in expanding their franchise and therefore also addressing the case of failing banks and giving us more options in case of crisis.

So, we are lacking a sort of a European JP Morgan, would you say?

I would like more than a European JP Morgan. I would like more banks with a more diversified portfolio being present in different parts of the banking union. I found it particularly interesting to see that Brexit was interpreted by some politicians, in particular – never by myself – as a way to bring business into the euro area. Now what we have seen is that the banks which have relocated after Brexit have generally taken a European perspective. They merged all the subsidiaries into the parent company. They're now branching out across the Single Market, and they can expand or contract their business in each Member State as they like, basically without any local constraint.

JP Morgan is also opening a digital banking franchise, with which they project to expand business digitally to retail customers throughout the euro area.

I see instead that our European banks are more segmented in their operations across national borders and that I think is a missed opportunity.

If the banks had a strong, large domestic market, they would also be stronger in the global dimension.

But what is the reason, in your view, that originally European banks are taking less of an advantage of the European market than Brexit banks?

The scars of the great financial crisis are still there. Before the great financial crisis, in the early 2000s, we had seen a significant increase in cross-border banking within the euro area. And when the crisis hit, these banks were broken up along national lines to manage their crises, with sometimes very contentious discussions between national authorities, which is what led to the banking union. The paradox is that now that we have the banking union to address those issues, the memory of those bad experiences still causes a lot of reluctance at the national level. There is also still the legacy of some regulatory constraints in our legislation.

Because of this standstill on the banking union, no progress, isn’t there a risk that actually, instead of moving forward from this stance, we could move a little bit backward? In the sense that a lot has been done to centralise banking supervision, but of course national authorities are still there. They would still like to have their say and they do because of the system that recognises this. But there is new regulation coming up, for example on climate change, cyber security, money laundering – there is still a lot of ground to cover. And don't you see there could be a risk, the temptation to go backward instead of moving forward on the banking union, more fragmentation?

No, I don't see this risk. Let me say first of all that it is true that the debate on the banking union got stuck. But the agreement on the Council table has been a first step in terms of improving the framework for crisis management, greater harmonisation and stronger safeguards. So the discussion on the package on crisis management and deposit insurance (CMDI), which is now with the Council and the Parliament, is an important step towards the completion of the banking union. It is also an important step towards making our life a bit easier in terms of managing crises, because it tackles some important practical issues that shouldn't attract a lot of political resistance but create a little bit of optionality for the authorities on the tools that we can deploy in case of crisis, especially for mid-sized banks. In any case, this is important progress in harmonising the way we deal with crises, which should build trust between Member States to finally make the final step of completing the banking union. In terms of national authorities and clawing back powers, I don't see that. It's clear that at the start of the banking union, some national authorities were a bit disappointed at losing their direct powers and responsibilities. But I think in almost ten years of European banking supervision, a lot of progress has been made. I feel that now all the members of my Supervisory Board are well committed to the functioning of the Single Supervisory Mechanism. I think all the national authorities recognise that we are collectively able to strengthen our supervision by building on good practices. Pooling the skills and resources that we have across European banking supervision also gives us greater firepower in terms of what we can do as supervisors. So the perception I have is that now the focus around the table is more on how to work better together.

So, there is no going back?

No, I can tell you there is no going back. I feel there is strong support around the table. And by the way, the national authorities are an important component of European banking supervision. They participate in our Joint Supervisory Teams and are the backbone of our on-site teams. There is a lot of involvement and participation, and I think this is an element of richness.

But don’t these national authorities like to have a common guarantee for deposits? This would be a very strong instrument that would also help national authorities.

We do have the first component of a safety net, which is fully mutualised – the Single Resolution Fund. So for the largest banks, which are earmarked for resolution, at the end of this year we will have almost €80 billion available to finance a possible crisis. These are funds provided by the banks. There is, of course, the backstop that is expected to be provided by the European Stability Mechanism when the treaty is ratified, but it’s a private fund. And in any case, if there are losses, the banks will replenish the funds themselves.

For the final element, the European deposit insurance scheme (EDIS), I would say that there is this misguided perception – especially on the political level, which I always get when I talk with finance ministries – that if you go towards EDIS, you as a national finance minister would be signing up a guarantee for almost €8 trillion of deposits. And then there is always this concern, “Oh my goodness, I then have to deploy my fiscal resources to support the depositors of my neighbours’ banks”. That is the political sensitivity. What people may not realise is that if you look at the best example we currently have, which is the Federal Deposit Insurance Corporation (FDIC) in the United States, there they also have a backstop from the US Federal Government but this backstop is almost never activated. The fund is also used to finance the exit from the market of a large number of small and medium-sized banks without any damage to the depositors or borrowers and on a least-cost basis, i.e. costing less than it would cost to pay back the depositors. If you have a good crisis management framework, you will need to have a backstop, but you will not need to deploy it. That’s the whole purpose of EDIS. And the more you mobilise and the larger the fund, the less likely it is that you will have to deploy it. It is a little bit of a political sensitivity that I hope, as time passes and trust comes back after the global financial crisis, we will be able to overcome. Hopefully in the next legislature.

I would like to follow up on this and ask if it will always be possible for national supervisors to give waivers on a liquidity basis. I think this has been an issue in some cases, for example with UniCredit and HypoVereinsbank. Do you have the impression that now that national supervisors are giving more leeway, more room, large international European banking groups can really take advantage of their outlets in other countries?

As a matter of fact, for banks under our responsibility, it is the ECB that grants these waivers. And to be honest, the waivers are relatively contained. But let’s say it is possible. Also, I have publicly stated that we are open to discussions if banks want to activate these waivers. They can simply file an application and we will process and discuss it in the Supervisory Board. Of course, we need to look at the specific risks and business structure, the governance of the group and arrangements within the group if something goes wrong, the recovery plan. But in general, we are open to discuss and grant these waivers if banks file an application.

I have another follow-up on that topic. It’s about the new operational risks, such as the ones you mentioned: environmental and cyber. These risks are global by nature, but this kind of regulation is still very often national for several reasons. Cyber risk is a good example. Anti-money laundering is another example, because we had to negotiate this European agency. So, how can you make sure that it’s really under the mandate of European banking supervision and it’s not too segmented between all the countries?

You are absolutely right. These risks are much more cross-border than they were in the past. If you have cyberattacks coming from state-sponsored initiatives, of course there is a chance they will also hit banks in different Member States. So every mechanism for sharing information is very important. Again, in this area we definitely have our own mandate. Everything to do with operational risk – for example IT and cyber risk – falls under supervision, thus we are definitely covering it. We will also have the Digital Operational Resilience Act (DORA), which is basically giving a legislative base to what we are already doing. We are already collecting information on cyber incidents at European banks, and with DORA we will also be able to disseminate this information to all the banks, so that they will be able to prepare themselves and react in a more effective way.

The same applies for climate and environmental risks. It is clear that this is a transition which is affecting all banks. Having a common supervisory approach is therefore of great benefit to the banks themselves. In any case, unfortunately we are already accustomed to dealing with prudential concerns that are handled differently in the Member States. We are currently running a fit and proper process in 21 Member States with 21 totally different pieces of legislation in terms of procedure and the moment in which we should carry out the valuation. When we have different legislation, we apply different legislation. The fact that European banking supervision is relying on the national authorities is helpful in that respect. But whatever the national legislation, we try to apply the same prudential concepts, and I think that’s very valuable for the banking sector.

We want to understand your view on why European banks are trading so far below their book value. How can we explain that investors continue to penalise the European banking sector despite the good results last year and last quarter, and the strength they demonstrated during the spring crisis?

The issue of low valuations has been a concern for us as a supervisor for a long time. If a bank has a low market valuation, it means that if it needs to raise capital, it will be very difficult, because it would need to dilute the existing shareholders. And we have seen, for instance, that in the case of Silicon Valley Bank, the bank made losses on its securities portfolios and went to the shareholders to ask for recapitalisation, the shareholders didn’t provide support and withdrew their deposits, resulting in the bank going bust in a matter of hours. Low valuations are a concern from a supervisory point of view. In the aftermath of the turmoil, we saw that the banks that were on the markets’ radar in terms of concern were precisely banks that had low market valuations. It is important that banks gradually strengthen their investability, their attractiveness for markets.

There has been some improvement. So, if you take the price-to-book values before the Russian invasion of Ukraine or around the Russian invasion of Ukraine, they were around 50%. We are now in the region of 70%, which is still low but a bit better. The increase in interest rates, to some extent, has generated some improvement.

Analysis in our Financial Stability Review shows that the current valuations are not justified by the fundamentals alone. If you look at the fundamentals of the banks, the valuations should be higher. What is probably driving a rather pessimistic market perception is the concern that the increasing profitability is maybe not sustainable. It will be reabsorbed in a relatively short span of time, when the pass-through to depositors is completed. We'll have to see. Banks will have to show their ability to maintain satisfactory levels of profitability. I would also say that maybe some governments’ decisions to tax or introduce measures on the higher perceived profitability of European banks has, for most investors, reinforced this perception that European banks will never be profitable, because when they start becoming profitable, somebody comes in and takes their profits away from the shareholders. That’s also an issue of perception that maybe should be considered when discussing these policy initiatives.

Would you say that European banking supervision contributed to investors’ mistrust in European banks by introducing the dividend ban during the pandemic?

The honest answer is yes. I think that the perception among investors following that intervention has been negative. In practice, I think this is unfair because we did exactly the same thing as other jurisdictions. The problem is that other jurisdictions managed to achieve it through moral suasion. The banks went out and published a press release saying that they had voluntarily suspended their distributions. While we had to activate our administrative machinery to get it done. At the time, our banks were a bit more reluctant to do it on their own.

All in all, I think that we have been loyal to our own words. I have always said that this was a one-off intervention justified by the exceptional situation of the pandemic, which gave zero visibility on the actual developments in terms of losses at banks before, of course, the government interventions. I clearly said that after the pandemic we would go back to the business-as-usual assessment of individual, bank-by-bank capital trajectory processes and distribution plans, which is what we have done. Banks are distributing plenty of money via buybacks and ordinary dividends. I hope the trust in what we have committed to do will be restored.

In recent months we have seen windfall taxes all over Europe and countries worried that rates are not passed through fast enough to depositors. How do you consider this? Is it legitimate? Does this point to issues that should be tackled by the ECB?

What I would say is that supervisors don’t intervene on government or parliament decisions on taxation. That’s not our task. What we do as a technical authority is highlight some issues that some of these interventions can raise.

The first point I would make is that there is this perception, which is quite widespread, that banks are making huge, disproportionate profits. It is true that profitability has improved significantly, but if you look at the return on equity of European banks, it’s still below the cost of equity. We had approximately 10% return on equity at the end of the second quarter of 2023, and the cost of equity was 13.2%. Technically, banks are perceived by the markets as not profitable enough. There is this disconnect between the public perception and market perception of banks, which is also reflected in the low valuations that we were discussing before.

The second point is that there is a bit of concern that when taxes are raised, they’re usually labelled as temporary. But we have also seen after the global financial crisis that they tend to remain for a longer period of time. In general, they can create a bit of a longer drag on profitability, which again reflects itself in markets’ perception of banks.

The third point that we notice is that sometimes these interventions target interest margins instead of net profits, which means that they don’t take into account the provisioning and the costs of the banks. As the deterioration in the macroeconomic outlook and rising interest rates increase the likelihood of asset quality problems, we would expect banks to increase provisions. And costs will also be affected somewhat by the inflationary pressures. We therefore think that this could, to some extent, create wrong incentives for banks in terms of their provisions. For instance, in Italy I’ve seen that they’ve also started considering this aspect of capital strengthening as an element in the calibration of tax.

These are the important points that we try to flag to the national authorities who consult us, to alert them to how their measures will be perceived by the market and what the undesired consequences of some of these measures might be.

Jumping back to the crisis in March 2023, one lesson learnt, I think you also mentioned it, is that proactive supervision is helpful and necessary. You stressed that. But where is the line to prevent supervisors from being too intrusive and too co-managing?

It’s an important point. First of all, for me and for the Supervisory Board this has been the main lesson from the spring turmoil. The US Federal Reserve and the FDIC clearly said in their candid report on Silicon Valley Bank and Signature Bank that some of the holes in the banks’ risk control systems were identified well before the final default of the banks and there was a long lag before enforcement action was taken. This made me scratch my head and think, “Well, do we also have some areas in which we have not been effective enough, identifying an issue without remediating it fast enough?” And my perception is that we have been very effective in a number of areas, especially when there have been clear yardsticks, clear quantitative targets that we could set for the banks.

On capital, we wanted a robust capital position. We gave the targets to the banks and the banks strengthened their capital position. On non-performing loans, we gave clear guidance and this was also fixed. The areas which are more difficult for remediation are exactly the areas where we don’t want to take the place of the bank managers, and these are governance and business model sustainability. Here, I think we are being very measured. But there is also a point when we should ask ourselves whether we are too measured or too shy in terms of our interventions. If you look at Credit Suisse, for instance, it is clear that the bank itself had identified major shortcomings in its internal controls and internal risk management, and they were unable to repair these shortcomings until the day they went under. The auditors’ report a few days before the crisis suggested that the bank’s internal controls did not ensure sufficient reliability of the valuations in the balance sheet, which is quite a statement. When you see this, when you see that the business model is not sustainable – maybe banks that have high capital and high liquidity positions, as was the case for Credit Suisse – if the business model is not sustainable and if the internal controls are not good, they can crash against the wall. I therefore think we have a duty as supervisor to intervene. And of course, we need to walk this narrow line of pushing the management and the boards to act rather than taking responsibility ourselves. I cannot say what the business model of a bank should be, but I can see a business model that is not sustainable and can lead the bank against the wall. When I find myself in the second scenario, I need to set the right incentives and sometimes also raise my voice to make a bank change its practices.

But why? Maybe it would be better if this bank disappeared.

Take the case of Credit Suisse. That also generates some side effects in terms of the impact on the markets, and eventually also on other banks and, in the case of Credit Suisse, guarantees had to be provided by the government. So it’s important that we act before it’s too late.

I’m not making a judgement. No one can tell if it’s a better world with or without Credit Suisse. Of course there are side effects because it’s so huge, but we don’t know if it’s a good or bad thing. It’s just a fact. They disappeared.

Yes, but I have a legal obligation. If a bank has weak internal risk management that could jeopardise the safe and prudent management of the bank and, eventually, its stability, that’s my number one mandate, so I need to intervene. The legislation provides me with the tools to intervene, and it would be a dereliction of duty if I didn’t. This doesn’t mean that I cannot let any bank fail. I’m totally against the idea that we should live in a world of zero failures. At a certain point, if I realise that a bank is not able to remediate the issues, I should be strong enough in my escalation to eventually push the bank to give back the licence and exit the market. And I need to do this in the smoothest possible way, trying to avoid any impact on the bank’s customers, depositors, deposit guarantee schemes and the overall safety net.

Talking about business models and looking at the future for European banks, they are under a lot of pressure. The digital euro is not here yet, but I think it will come. And then you have cryptos, stablecoins and big techs, all of which are creating their own payment systems. At the same time, we have this huge need for investment for the climate and digital transitions – trillions of euro – which will be not only public investment but also private. And we don’t have the capital markets union, so everyone will be looking to the banks. But while banks can do a lot, they cannot do everything – they also have constraints on their capital. How can banks evolve in this world that is changing so fast, without the risk of disappearing?

For a long time now I’ve been hearing this point about the banks being sick and about to die, and other players being poised to replace them. In general, banks have been very effective in tackling these challenges, in most cases either by buying their challengers or launching partnerships with them, or by investing and developing these new skills in-house. And, at least in the European Union, they’ve maintained a central role in the financial sector. Whether this is good or bad and whether we should rebalance towards capital markets is a different policy question, but so far, banks have been quite effective. I don’t see a digital euro as a challenge to banks. It is an attempt to evolve central banking money in a digital age. If you also look at how the proposal is being shaped and calibrated, it is actually targeting an overall amount which is in the same ballpark as cash. So it’s looking at cash users who might in the future prefer to use digital means of payment, without being obliged to do so.

Banks are scared, I think, of the digital euro.

Banks are concerned, but they are engaged in the digital euro project. And I think there are several important elements: the calibration of the quantitative limits, the remuneration aspects, and fleshing out the role that banks will play at the front end in distributing a digital euro to customers. If these three elements are framed in the appropriate way, banks should not be concerned. They will still be the main interface with customers, they will be remunerated for their services, and the remuneration and quantity constraints should avoid a digital euro becoming a major competitor for commercial bank deposits.

But, at the same time, a new infrastructure would exist. Wouldn’t it make banks less systemically relevant in the payments area?

No, I wouldn’t say so. First of all, I would welcome any infrastructure that enables us as citizens to make real time payments in euro across the euro area, without being charged unreasonable fees. So that would mean payment systems that are much more integrated and modern, and I think that would be a positive development. I don’t think anybody expects this to crowd out the commercial banks’ payment instruments. And there are a number of other payment institutions that are thriving in the market at the moment, without having created the major damage that banks were foreseeing when the revised Payment Services Directive (PSD2) was issued, for instance. So what we see is just an improvement of the services that customers can enjoy.

In terms of the crypto aspect, I don’t see crypto as a direct challenge to the role of banks. I see it more as a challenge to the role of supervisors in the sense that there are certain elements of the services that are provided in the crypto world that can, to a large extent, mimic the provision of bank-like services, so payments first and foremost, but also with decentralised finance and other types of financial services that banks usually provide. So there the issue will be, and I mentioned it in a recent speech in Venice, the policing to some extent of the perimeter to make sure that if some entity in the crypto world starts acting as a bank, it is actually brought under the remit of banking regulation and supervision, just like any other institution. And here the difficulties are serious. For us, there will mainly be the issue of deterritorialization – the fact that these entities sometimes do not have precise headquarters. They have a number of establishments here and there. You don’t understand where the headquarters are or who the owner is. There is a lot of opacity. You have an issue of consolidation. You have seen in the case of FTX that you cannot have a group-wide perspective of the business and of the risks that these entities take. And when you look at decentralised finance or the original cryptocurrencies like bitcoin, you don’t even have an issuer or an entity to supervise. So that will be the challenge for us more than for the banks. The issue will be to make sure that once somebody is conducting banking activity, it’s brought under the remit of banking regulation and supervision.

For big techs, I think that is where there is a definite challenge for banks. Of course, the big techs could take a banking licence, and if they did, there would be the issue of the significant market power they would have in terms of their ability to combine a huge set of information globally. At the moment they are not showing an interest in moving in that direction, maybe because they don’t want to be supervised. But if that were to happen, of course it would be an issue in terms of the structure of the market. Or they could, as they’re doing now, develop more banking as a service, which I think is the real challenge. So trying to act at different points of the value chain of banking without taking a licence, but de facto offering, through partnerships or subsidiaries, different types of services that emulate a significant portion of banks’ value chain. And we don’t know how to deal with this from the regulatory or supervisory point of view at the moment, so that could be a more important challenge, I think.

I have two questions on credit risk in the near future. The non-performing loan (NPL) issue is of course far behind us, but how concerned are you by all the crises in commercial real estate we are seeing right now? And we're talking about things that are not on the banking balance sheet – there are increasing links between banks and non-banks. We can also see growing competition for private debt, because banks don't want to be left behind by the funds, so they try to replicate what they do, or to join forces with them. So those are the two kinds of credit risk I was talking about, but what’s your take on this?

First of all, we shouldn’t be over-optimistic and say that the NPL issue is resolved once and for all. We dealt with the legacy issue of the past crisis, but generating NPLs is unfortunately part of the banking business. And with the deterioration of the macroeconomic outlook and the higher interest rate environment, we of course expect asset quality to deteriorate. You mentioned commercial real estate, which has indeed been an area of attention for us already since 2018. We have done a lot of targeted reviews and on-site campaigns in the area. We have already seen a downward correction in prices, and we expect this to continue. Our focus now is on refinancing risk in commercial real estate in particular, because we have seen through our analysis that many contracts are “bullet” or “balloon” loans which have a lump sum repayment towards the maturity of the loan, when the developer generally refinances. And of course now, refinancing with possibly different prices for the property and higher interest rates will be challenging. So that could be the moment when the credit risk materialises, and we are looking quite carefully into this aspect.

You’re also right that exposures to non-bank financial institutions have been quite high on our agenda. We started already during the pandemic and the Russian invasion of Ukraine, when we saw elements of high volatility, for instance in the energy market. So, exposure to commodity traders has been an area of attention. And after the collapse of Archegos, we’ve also focused a lot on prime brokerage and counterparty credit risk, which is the main area where banks have an interface with non-bank financial institutions. We have identified weaknesses in banks’ processes in that area, both in the onboarding of clients and especially in the monitoring – in other words, getting sufficient information from these customers to monitor the level of leverage (including synthetic leverage) that they are taking on, and the concentration of their portfolios. And then we are asking them to do more stress testing on these exposures.

Beyond that, there is also the broader question of whether some of these entities should come under the remit of regulation and supervision. This is something the Financial Stability Board is investigating, and the ECB has been quite vocal in arguing that now the time is ripe. The expansion of this sector has been significant, from €25 trillion in 2009 to €51 trillion in 2023. It is now larger than the banking sector. Sometimes we tend to bring everything together under the umbrella of non-bank financial institutions, but the entities can be very different. There are relatively safe ones, and others which take large leveraged positions. So I think we need to be careful about how we do our job there. But there could be a lot of concentrated exposure, liquidity mismatches and excessive leverage, and in my view this would call for some extension of the regulatory environment.

And would you know how to supervise those kinds of players? Would it be similar to banks, or would you need to develop new skills and new techniques?

I’m a bank supervisor. I’m not asking to supervise them myself. But yes, the prudential supervisor could of course take on this responsibility. Whichever authority takes on this responsibility needs to develop the expertise because these are different animals to banks, so we shouldn’t expect to supervise them in the same way as we supervise banks.

But would you agree with those who say that the next crisis could come from the shadow banking sector?

I always try not to read the crystal ball. I try to stay very focused on my little backyard with the banks, and to reduce the probability that the next crisis happens in my backyard. Of course, I don't wish the next crisis on anyone else, either.

We have a question on your next backyard. You have spent your entire career in banking supervision and regulation. Now that you’ve reached the most prominent position in your field, where can we expect to see you in the coming years?

I consider myself very privileged. I started my career as a supervisor in 1988 at the Banca d’Italia. It was the year when the Basel I agreement was signed, and my first memo was actually on what was called the Cooke ratio. That’s really the age of the dinosaurs in the world of banking supervision. It was also the year in which the Single Market was launched and the second Banking Coordination Directive was approved. I’ve basically been working in European supervision my whole life. I experienced the ECB’s establishment in 1999, the Committee of European Banking Supervisors, the European Banking Authority, the Single Supervisory Mechanism, so I cannot ask for more to be honest. I don’t have big plans for now. In fact, I’m also curious to know what I will be doing. For the moment, I have accepted a kind offer to join the Financial Markets Group at the London School of Economics. So I hope to find ways to continue contributing to the work of the supervisory community.

Will you also settle in London?

I will. It will be the first time living outside of the European Union for me. I still have a flat there and my daughters are there, so it’s still home.

Claudia Buch will be your successor. What do you think is the most urgent issue that needs fixing or promoting in European banking supervision?

Claudia will of course have to decide which fights she wants to pick, and what will be the main objectives of her mandate. We have launched a discussion, which she has also been involved in as a member of the Supervisory Board, on the review of our Supervisory Review and Evaluation Process following the report of the independent expert group. That will be an important element in establishing a stable environment for supervisory practices and methodologies for European banking supervision. Aside from that, I think that the most important function you have in this role is to give confidence and backing to the supervisory teams. It’s really a difficult job being a supervisor. You need to challenge banks. Sometimes you are faced with a lot of pressure. And you need to be confident that you can apply strong supervision and that you always have the backing of the top management of the organisation. I think that’s the most important advice I could give her.