Interview with Der Spiegel

Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM),
30 June 2014

You are often described, unkindly, as a strict headmistress. Does that bother you?

I know, my children always say that I am boring, too organised. And, yes, I know exactly what I want and how to get it.

You have to build up a 1,000-person authority from nothing within a year – and are carrying out a huge stress test at the same time. Isn’t that something of a suicide mission?

Not at all, as we will demonstrate. But it was only possible because we were established under the umbrella of the ECB, which helped us out with staff and infrastructure. So we are like a start-up, but one that began work in the protective atmosphere of a very efficient incubator. When we officially take over the supervision of euro area banks in November, we will be ready to go. Half of the team has already been recruited.

Nevertheless, the ECB did not have any supervisory experience either. Why should you be able to do things better than the national supervisors, who, after all, know their banks inside out?

Because there are now 1,000 additional supervisors within the SSM. We are also continuing to benefit from the competence of national authorities, such as BaFin, but the decisions are made in Frankfurt. And distance is helpful here, because the pressure that supervisors are subject to from politicians or elsewhere can be difficult to handle. Last but not least, we are gathering the best instruments and techniques from all supervisors – for me, building on the best supervisory practices is a magical concept with a strong team-building dimension.

The documentation will mostly be in the languages of the respective countries. Won’t you still be dependent on what national supervisors tell you – and what they don’t tell you?

Large banks have many of their documents in English. Language could be an issue with the smaller institutions. But in my 40 years of experience, the average supervisor does not see himself as a diplomat, but just says straight out when he finds something that worries him. And in future he will no longer be reporting such things to his boss at home but to a team leader in Frankfurt. We have decided that the team leader must be from a different country from the bank concerned.

You have to deal not just with 18 different banking laws, but also with an endless number of national peculiarities, such as the German landesbanks. Are their days now numbered?

I’m not going to comment on certain banking sectors, and I still don’t know enough about them. But each bank must demonstrate whether its strategy is sustainable, whether it can be profitable in the medium term.

For some landesbanks, there are pretty big question marks over precisely those points.

There are also question marks with regard to large commercial banks. If there is a political decision at the European level, for example, that banks have to separate retail banking from investment banking, this will certainly have implications for the profitability of some institutions.

In order to know how things stand when European banking supervision starts in November, you are currently conducting an assessment of banks’ balance sheets, which has not been done in this way before. The first phase has already been completed. Are you worried by the results?

The figures are still being evaluated; I don’t have a comprehensive picture yet.

Many companies, including Deutsche Bank, have raised large amounts of fresh capital on the markets in recent months. Have the biggest gaps now been plugged?

We do not know yet. The stress test will be tough, and only then will we be able to judge how things stand. But we are telling the banks that they should take early action. When all the results are available in the autumn, things will get tight on the market.

Does that mean that the banks already have preliminary results?

No, but they do have an idea of how they are doing. And if they don’t know how much capital they are going to need, they should opt for more rather than less.

Who will ultimately foot the bill if banks fail the test and can’t raise the necessary capital on the market?

If banks need capital in the future, shareholders and creditors will first have to bear the costs. But in order to ensure that the assessment of the banks is credible, the countries involved have promised to have public backstops in place, if needed. However, there is a high price to be paid for using these backstops.

There have been vociferous complaints about this from some quarters, including Germany, because it ultimately means that taxpayers will again have to bail out weak banks.

I understand that politicians are pushing for a strict application of the new Resolution Directive and wish to avoid exceptions like this. But, in a way, our comprehensive assessment is the final act in the old world. This is why we need a public backstop, so that we can show the markets that we want to conduct a very serious and tough test and are expecting capital shortfalls that may not be made up by private investors. The success of the stress tests in the United States was based on the existence of a public backstop for such cases. This was not the case for previous tests in Europe, and this led to considerable distortions.

If possible, should the money come from the European Stability Mechanism (ESM), which was created to provide assistance to countries experiencing difficulties?

As a last resort, the ESM would be an option. But we will not shy away from winding down banks.

Many economists see persistent deflation, i.e. a period of falling prices, or a stop in Russian gas imports as the biggest economic dangers at present. What is the point of a stress test that does not include these scenarios?

I think that the test covers a large number of risks. We can’t keep coming up with new scenarios just because the world keeps turning.

You wanted to exclude the Franco-Belgian banking group Dexia from part of the test. Why?

I personally didn’t want anything at all. Since I used to be directly responsible for Dexia, as head of the French banking supervisory authority, I did not comment on this topic in the new supervisory authority. But we are talking about a bank that is being wound down, so it has already received the most severe punishment foreseen in our stress test.

We have heard that the ECB’s Governing Council rejected the special treatment.

You will see in the end which banks have received what treatment.

Other credit institutions have tried to hoodwink the ECB. For example, in December 2013 – just before the cut-off date for the stress test – Spanish banks sold government bonds worth more than €20 billion, only to buy them back shortly afterwards. So what value do the results of the test really have?

It’s not that easy to trick us. We have asked for clarification when we have had concerns.

But did you sanction the behaviour?

We got the answers that we wanted. I’m not going to say anything more on the subject.

We all remember previous tests, where, for example, Cypriot banks passed with flying colours, only to collapse shortly afterwards. Is there not a danger of the same thing happening to you?

The stress test is like a medical check-up. A patient can test negative for Aids, say, and then die of cancer a few months later, but this time we are checking for all significant diseases.

An illness that many banks are currently suffering from is high legal costs. The French bank BNP Paribas, for example, is widely expected to be fined almost 10 billion dollars in the United States for violating sanctions. Will you cover that in the test?

I can’t comment on BNP. The test is based on the situation at the end of 2013. But a lot has happened since then, of course. This is why we also ask the banks to inform us about events after the cut-off date, both positive and negative. And these things will also affect the capital requirement that comes out of it. Legal risks also play a role.

Academics view the European banking sector as chronically inflated and dangerously indebted. Can a stress test sort that out?

I’m not saying that there won’t be any risk left in the European banking system after the test. The main aim of the test is to create transparency about how the banks are doing, what is on their balance sheets. This will instil confidence in investors.

ECB President Mario Draghi wants to encourage banks to lend more. Does that not run counter to your interests as supervisor, given that you want banks to take on less risky business? 

Lending to the real economy was not the main cause of banks’ problems in the past. But it is also true that a bank does not need any “regulatory gifts” to extend a sound loan. If a transaction makes sense, the banks will conduct it on their own initiative.

When will the next stress test be?

There will be a stress test every year. But they will not be as comprehensive as the one this time. The tests will evolve in a similar way to those in the United States, becoming more of an instrument of ongoing monitoring.