Interview with the Times of Malta
Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM),
conducted by Vanessa Macdonald and Kurt Sansone on 5 October 2014
Can consumers of financial products view the SSM as an adequate response to the fallout from the 2008 financial crisis?
Consumers of banking services can indeed view the SSM as part of an adequate response to the effects of the crisis. The SSM aims to strengthen the banking sector and to make sure that in the future banks do not take excessive risks. An important step in preparing the SSM is the comprehensive assessment, which is a financial health check of 131 banks in the euro area. Its purpose is to restore confidence in the European banking sector by fostering transparency in banks’ balance sheets and by ensuring that they are repaired where needed by identifying and implementing necessary corrective measures. To a large extent this balance sheet repair has been taking place already, as many European banks have taken proactive steps to make their balance sheets more robust. Since mid-2013 in particular, European banks have implemented write-offs and increased provisions and capital. According to data collated by the national competent authorities (NCAs), since July 2013 SSM banks have strengthened their balance sheets by almost €200 billion. The European Banking Authority’s end-of-2013 estimate of the average Common Equity Tier 1 ratio of Europe’s largest banks is 11.6%, which is broadly equivalent to that of their American counterparts. This is already an important step towards a stronger banking system.
Does the SSM have the necessary clout and teeth to nip a banking crisis in the bud to avoid the painful meltdown witnessed in the aftermath of 2008?
Supervision will be intrusive, tough and fair. That’s my commitment. The SSM will provide a thorough, comprehensive and tough supervisory framework to better detect at an early stage the risks developing within a financial institution. It will allow the supervisory authorities to impose the necessary mitigants and corrective measures. Also, our intention is to make the use of public support more difficult so that the taxpayer does not have to bail out banks in the future. But having said this, I must also make clear that the ECB cannot once and for all eliminate the risk of another financial crisis. It would be absurd to make such a promise. However, we strongly believe that there has never in the past been a European institution better equipped to minimise such a risk.
What does the SSM mean to citizens and the businesses in Malta?
The SSM will create the conditions for a more integrated and reliable financial market across Europe. By reducing the institutional and legal barriers between nations, the marketplace broadens. This should give businesses and households greater access to a wider range of safer financial products. Let me also say that the SSM should not be seen in isolation. The banking union is based on three pillars: the SSM, the Single Resolution Mechanism and a common system of deposit protection, which will be ready at a later stage. A full banking union will be achieved when confidence in banks and deposits will be independent of the jurisdiction in which banks are established. And this will be an extremely important step forward for European integration and towards a future capital markets union.
Given that there are thousands of banks that operate in the EU, how will supervision be conducted? Does the ECB have the capacity to supervise all the banks?
To ensure efficient supervision, banks are categorised as “significant” or “less significant”. The ECB will directly supervise the significant banks, which account for approximately 85% of the assets of the euro area banking sector. The day-to-day supervision of the significant banks will be conducted by the Joint Supervisory Teams, which comprise staff from both the ECB and the NCAs of the countries in which the credit institutions, their banking subsidiaries or their significant cross-border branches are established. The NCAs will be in charge of the supervision of the approximately 3,400 less significant banks, but we are a single supervisory system: all the banks (significant and less significant) will be supervised according to the same supervisory manual, and the ECB can if necessary assume direct supervision of any credit institution to ensure application of the highest supervisory standards. The new structure of banking supervision will enable the efficient and rigorous supervision of all the banks in the SSM area through close cooperation between the ECB and the NCAs.
Criticism has been levelled at the composition of the SSM board, primarily made up of national supervisors, who would ordinarily not appreciate ECB interference in their domestic activities. Do you see this as a problem?
On the contrary, I have seen that Supervisory Board members from the various SSM countries work closely together and this is very gratifying. The SSM will be a truly pan-European organisation operating without national bias and prejudice. With its European frame of reference the SSM will be less subject to national political pressures. And let me mention here that the vote of a Supervisory Board member from a small country carries the same weight as the vote of any other member. We are here to ensure that the high standards introduced by the Capital Requirements Regulation and Directive, CRD IV, are applied in a homogeneous way across the euro area and hence provide a level playing field. This will help reduce market fragmentation, and money markets will work more efficiently across national borders. Finally, it should also be noted that in crisis times we will no longer see national supervisors requiring banks to match national assets with national liabilities. As of 4 November supervision will be truly European in nature to the benefit of the citizens of Europe. With the SSM the euro area enters a new era.
What will happen to the risk weighting of sovereign exposures of small and medium-sized banks – and what would be the impact of this on the Maltese Treasury, which has long relied on the strong support of local institutions?
One of the lessons that we learned from the crisis is that there is no risk free asset; even sovereign bonds are not risk-free. I therefore believe that in the future this will have to be reflected in the European regulation and there will be capital requirements for sovereign exposures. Currently the regulation applies a 0% risk weight for sovereign exposures in the Standardized Approach, which is used by small and medium-sized banks. As I have said in the past, large exposure rules should be applied to sovereign exposures to reduce risk concentration and help address the nexus between banks and sovereigns that aggravated the financial crisis. Regarding the treatment of sovereign exposures in the comprehensive assessment, let me clarify that, in the asset quality review, sovereign exposures are risk-weighted in accordance with the current rules. However, like all other exposures, sovereign exposures are stressed in the stress test part of the CA.