Interview with Kathimerini

Interview with Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM),
conducted by Giannis Papadogiannis on 2 November 2014

The outcome of the EU-wide stress test for Greek banks was better than expected. How did we achieve this result?

Markets always have varying expectations. The objective of the ECB was to conduct a rigorous assessment of the banks participating in the comprehensive assessment and establish the Single Supervisory Mechanism, which will take over supervision of banks this coming Tuesday. I can assure you that for all the banks involved the assessment was tough, fair and, allow me to say, exhaustive. As far as the Greek banks are concerned, one must recognise that indeed a lot has been done in the previous years: fresh capital has been raised, the sector has consolidated, restructuring plans have been approved and are being applied… This is what was in fact reflected in the results published last Sunday. Nothing more and nothing less. As supervisors, we stand ready to take up our duties and deal with the challenges ahead of us.

What is your view on the overall outcome of the stress test?

I am very satisfied with the outcome of the comprehensive assessment. It was rigorous and strict, some people actually said it was draconian, and it has significantly boosted transparency in the banks’ balance sheets. Just to give you an example, the combination of the asset quality review with the stress test resulted in a €263 billion projected capital depletion over the three-year horizon of the exercise under the adverse scenario. Another example is the identification by the asset quality review of an additional €136 billion of non-performing exposures. We should also bear in mind that since the summer of 2013 the banks that will fall under the SSM’s direct supervision have strengthened their balance sheets by more than €200 billion, which has also played a role in restoring confidence in the European banking sector.

In Greece, many mergers and acquisitions of banks took place as a consequence of the crisis. Do you think that there is a need for greater concentration of the sector at the European level? Do European banks have excess capacity?

This is not for me but for the markets to decide. The task of supervisors is to perform their duties with integrity and fairness, and thanks to what we have been doing, the banks’ financial statements are now more transparent and investors can gain a better insight. Regarding Greece, the consolidation of the banking sector was a result of the crisis, which led to a significant decline of economic activity and adversely affected the balance sheets of the banks. I believe that the consolidation of the sector has helped Greek banks to withstand the severity of the crisis.

How important is the banking union for the EU? What does it entail for the banking system and citizens in practice?

The SSM establishes the conditions for a more integrated and reliable financial market across Europe. By reducing the institutional and legal barriers between nations, the marketplace widens, giving banks easier access to the capital markets. This should give businesses and households greater access to a wider variety of safer financial products. Let me remind you at this point that the SSM must not be seen in isolation since the banking union is based on two more pillars: the Single Resolution Mechanism and a common system for deposit protection which shall be ready at a later stage. A full banking union will be achieved when confidence in banks and deposits is independent of the jurisdiction in which banks are established. This will be an extremely important step forward for European integration and towards a future capital markets union.

Will banking supervision really be exercised across the board or will it ultimately benefit large banks or banks from big countries?

We are here to ensure that strong supervisory standards will be applied in a uniform way across the whole euro area. By eliminating regulatory arbitrage and removing national bias, the SSM will significantly enhance confidence in banking supervision and this should contribute to strengthening the creditworthiness of all banks, big and small alike.

There is still uncertainty surrounding economic prospects in the euro area. Is it possible to have solid growth without any significant credit expansion?

Access to bank loans is very important in Europe. A healthier banking sector – as a result of the establishment of the SSM and the completion of the comprehensive assessment exercise – should be better equipped to support economic activity more substantially. Let me also mention that the European economy relies more on the banking sector to fund entrepreneurs than others, such as the US; but we should also note that the opportunities for corporates in Europe to raise funds from the markets are gradually increasing and this too should support economic activity in the future.

We have been experiencing a low interest rate environment for a long time. What would this mean for banks, and how will they react to a gradual exit from the current accommodative monetary policy in the future?

It is not for me to discuss monetary policy issues, but in principle this period of low interest rates should help economies get back on track and this will benefit the banking sector and European businesses and households as well.