Interview with El País

Interview by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM),
conducted by Xavier Vidal-Folch,
published 2 November 2014

In 40 years of supervising banks, what have you learnt?

To be tough, intrusive and fair.

You have gained a reputation that bankers fear.

They know that we supervisors have to be strong to bring about a stronger and more profitable banking sector, so that it can fulfil its mission, which is to finance the economy. It’s in the banks’ interest.

Do all of them know this?

Yes, they do. Especially after a major crisis, like the recent one. It would be absurd to think that it cannot recur. If it did, the important thing is that banks are well capitalised, with good-quality capital, and thus able to absorb losses. The secret is simple: sufficient capital of good quality.

Who was to blame for the European financial crisis?

Several factors come into play here. Some banks took on excessive risks, too much leverage. And those risks were not properly identified or mitigated because of too soft regulation and supervision that wasn’t tough enough.

“Some banks have no future”, you once said. Has the recent asset quality review (AQR) shown you are right?

The exercise has still not been completed. Some of the 25 banks that showed shortfalls still need to recapitalise, and they are preparing their capital plans. That means that there will be changes in some of them; they have to think about their business models. Implementing the comprehensive assessment (SSM) is not just about filling some gaps or shortfalls, but will be a “gear changer”, leading to profound changes, where needed, making banks present solid, credible capital plans with sustainable business models.

But now you can draw a conclusion.

I’m very satisfied with the quality of the analysis of the assets, which has ended up showing a need to adjust asset values by €48 billion and to increase non-performing exposures by €136 billion. It is a very good start, compared with previous tests.

Are there any skeletons in the cupboard?

No. I don’t think so.

And if there is one, will it be small?

No. I don’t think there is one. This review has been exhaustive, ad nauseam. Another thing is that we are in a transitional period until all the capital requirements of Basel III become binding as of 2018. Also, it is still appropriate to harmonise at European level some different national standards. We will do that.

The previous tests ended in a fiasco: banks which passed them then failed. Why would it be any different this time?

Because this time, in addition to the stress tests, we have undertaken an asset quality review, which wasn’t the case previously. The preparation has taken months, in collaboration with the European Banking Authority, and has made it possible to establish criteria for the classification of loans, which were not uniformly defined, as well as to increase provisions.

Will this exercise encourage bank concentration?

Many elements are involved in merger decisions. If, after this exercise, a bank considers it necessary to merge, both the bank and the markets know that its balance sheet is perfectly clean, a situation which facilitates investments and mergers. It’s not for us to decide on the concentration, but for the markets.

The shadow banking sector does not come under your supervision because it is in the shadows.

The ECB is supporting the European proposals to supervise and mitigate its risks. As for us, we are not completely powerless vis-à-vis this sector. Shadow banking institutions have relationships with the banks, obtain resources from them and thus we can follow them, partially and indirectly, through the banks.

Bankers are complaining that the new rules and the strengthening of the capital base are hurting their ability to lend.

I don’t agree. That’s not my experience. We don’t have overregulation. During the crisis there wasn’t enough capital and its quality was not always adequate. This is changing, and in my view it’s a good thing. Only well-capitalised banks can provide credit to the economy.

Consumers and small businesses are complaining about the credit crunch.

I hope the SSM can help with this. Single supervision will help to align countries and mitigate the dispersion, the fragmentation. If we, the supervisors, do our job, then we take care that the banks are well capitalised, while the other actors have to play their roles as well.

What needs to be improved in the next stress tests?

It hasn’t yet been decided when they will be carried out.

Are they being prepared, say, for 2015?

The stress tests are a standard tool in supervision. The difference in this case is that the results have been made with a public methodology and the results have been published. We are ready to use stress tests in supervision, but it doesn’t always mean that we do it publicly.

Powerful supervision with a weaker bailout fund can cause new crises: a problem is spotted but there’s no money to resolve it.

Much has been done, and extremely quickly. I myself was not sure we would already have the Single Resolution Mechanism and the legal tools of the Bank Recovery and Resolution Directive that we now have to deal with potential problems in banks. The European Parliament worked hard and well on this. We are now in a transitional period until the full entry into force of the rules in 2016. The resolution fund will take time to be fully financed, but if necessary it will be able to turn to debt.

The supervisor detects problems, and it’s up to the ECB to gather the resources to resolve them. These functions may clash, may preserve a conflict of interest.

Let’s not exaggerate. For 40 years as a supervisor inside a central bank I have never witnessed such a conflict of interest. Besides, the Parliament has established a clear separation between supervision and monetary policy. The decision-making process is very clear: the supervisor proposes the supervisory measures and the Governing Council of the ECB may only accept or reject them. The meeting agendas are different. And there are strict internal rules on access to information and the like to avoid this kind of conflict.

The SSM directly supervises large, systemic banks, but it only indirectly supervises small ones, and they too can trigger contagion and panic.

We are a single mechanism. We don’t directly supervise the less significant entities, but we do monitor their supervision, and the national supervisors who are in charge of their direct supervision do so using the same methodology, regulations, manuals and recommendations. It will be done in exactly the same fashion. And if we are not completely satisfied in a particular case, we have the powers to take over direct supervision.

You won’t hesitate to assume that role.

I certainly won’t hesitate. And besides, one of our four directorates-general will ensure that the direct supervision of the significant institutions and indirect supervision of the less significant ones are equivalent.

Someday they should merge, right?

The system is well thought out. One system, but decentralised for the less systemic banks, which as a group could have systemic effects, as we saw with the Spanish cajas [savings banks]. We will have the best of both worlds: the expertise and experience of the national supervisors and some distance in the decision-making process; and national supervisors still play a key role in respect of the large institutions.

What is it that Europeans have still not learnt from the US in this area?

We were probably too slow to conduct our comprehensive assessment after the crisis. Now, with the stress tests and the AQR we are in a situation very comparable to that of the US.

The plan with this banking union is that the next crisis does not land on the taxpayers’ doorstep – will that be achieved?

That is the main objective. We have never been better equipped to do so. Let’s bear in mind that the resolution fund will be financed by contributions from the banks themselves.