Interview with Irish Times

Interview by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM),
conducted by Cliff Taylor, published on 31 October 2014

What is your overall view of the stress tests and the reaction to them?

We have undertaken an extensive review of the most important banking groups in each country across the euro area. This has been a considerable achievement. The markets have received large amounts of detailed data, granular data. I believe that they can be satisfied.

One important thing was to have undertaken the exercise with the ECB and also with our colleagues in national competent authorities, meaning the Central Bank of Ireland, as far as Ireland is concerned. It has been very much a collective effort, which is encouraging because it is exactly how we have to work within the new Single Supervisory Mechanism (SSM), when the ECB takes over supervision from November 4.

Do you think the conditions are now in place for a pick-up in credit growth?

I think that to have a sound banking system, solid banks with clean balance sheets are a very important pre-condition so that banks can do their job of making loans to the economy, to corporates and to individuals. That is a preliminary condition. But it is not the only condition. Supervisors have done their job and this precondition, in my view, is met. Thanks to the transparency exercise we have undertaken, investors know now very well what is in the balance sheets of the SSM banks; this will make them more ready to provide funding and equity to banks that need it. I think this exercise was needed and it will deliver according to its objectives.

Are you concerned about the ability of any of the banks found to have a shortfall to resolve the situation?

A very positive element was that a number of banks took steps to improve their capital position before the end of the exercise: Banks have undertaken more than €203bn in balance sheet strengthening measures since summer 2013. (Also in 2014, they raised capital to meet part of the €25 billion shortfall). The remaining shortfalls to be covered are significant, of course -- because we are talking about €10 billion -- but still totally manageable in my view. We expect the banks to find private capital solutions. And we will review the capital plans that they produce and assess whether they are solid and credible.

What is your view of the situation in the Irish banking market after the stress tests?

I think that a lot of good work has been done by the Central Bank and the Irish government to restructure the banks and to pressure them to deal with the problem loans on their books. In the comprehensive assessment, most of them have shown that they were adequately capitalised. It is also encouraging to note positive economic data regarding Ireland over the last months. That will help to improve the business and economic environment and the banks’ situation as well. The important thing for me is that those banks are sound and healthy institutions that they can now lend prudently to the economy.

What is your view on Permanent TSB, which failed the stress test under the adverse scenario? Is it an important source of competition in the Irish market?

Yes. It is good to have healthy competition in the provision of banking services and for Ireland to have a number of strong banks. I cannot comment on individual banks but I can say that I welcome the comments of the Minister for Finance that he and his officials will work with Permanent TSB and other stakeholders to ensure a successful execution of the capital plan in 2015. I believe that Permanent TSB will find an appropriate solution. If I understand well the position of Permanent TSB, it has been assessed as one important element (of the competitive market in Ireland) and I share this view.

What is your view on the new macro prudential measures announced by the Central Bank to control the property market, involving new caps on the value of loans compared to the income of borrowers and the value of the property?

I strongly welcome such measures. They have been in place in France for some time and they have been very effective. They have a real impact on stopping asset bubbles in their tracks. So I think those are good measures. I can understand, as well, the criticisms, because such measures can have a disproportionate effect on those who cannot access cash to fund the deposit to purchase a first house and I have sympathy in this regard. However, on balance, I believe that the most important thing is to avoid destabilising the banking system. In my view it is irresponsible to give loans to people who possibly will not be able to repay them. It is so much worse for people to find that they cannot afford their commitments than to be declined credit because they do not fall within the loan to income or loan to value caps.

The restriction on the value of the loan relative to the value of the property has been particularly controversial in Ireland.

Maybe I am not the right person to ask the question, because in my country this is the case and I have always known that to be the case. It does no good for people to be placed in a situation where they cannot meet their commitments. This is something which has been shown by the subprime crisis.

What will the new system of supervision mean for Irish banks?

We will not do it alone from Frankfurt. The banks that will be supervised from Frankfurt will be overseen by joint supervisory teams. The head of the team will be in Frankfurt, but even for the biggest banks – such as Deutsche Bank and BNPP -- only 9 people will be in Frankfurt. The rest of the supervision, the most important part, will be conducted locally. Between 70 and 80 per cent of the people involved in the joint supervisory teams will be in the national competent authorities. This will also be the case in Ireland. There will only be a few people in Frankfurt to take care of the Irish banks -- the most important part of the work will be done by our colleagues in the Central Bank of Ireland.

What it is delivering is, to a certain extent, the best of two worlds. We will benefit from the expertise and experience of our Irish colleagues, but we will have some distance in the decision making process. At the end of the day the decision will not be taken in Dublin, but by a European Supervisory Board, located in Frankfurt, inside a strong European Institution: the ECB. So we will have the European dimension, the consistency and level playing field, but still will benefit from the experience and expertise of our Irish colleagues.

Is there a risk that regulation in future will be too much based on ticking boxes? That we are moving from an era of too loose regulation to over regulating?

I don’t think we have over regulated the banks. Most of the changes relate to more capital of better quality. Before the crisis there was not enough capital of sufficient quality. Supervision will not be about ticking boxes. It will be about being intrusive, asking a lot of questions -- totally understanding the business models of the banks, their operations and ensuring that the risks they take are properly assessed, managed and mitigated.

How far are we away from having a normally functioning banking market?

I think this exercise (the stress tests) will permit that. It may not be visible overnight. But I am pretty confident that this is the direction in which we are going and that we will see that sooner rather than later. The precondition of having a clean and transparent balance sheet has been fulfilled and now it will depend on the economic situation – there are other actors who have work to do, too.