Interview with Verslo žinios
Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Dalius Simenas on 20 January 2015
Lithuania is now part of the euro area and also part of the Single Supervisory Mechanism (SSM) for euro area banks. What difference does it make to clients of banks in Lithuania to have the banking union and the SSM?
I think it makes a difference in three ways. First of all, for borrowers: because of the comprehensive assessment [the asset quality review and stress test that was conducted for 130 euro area banking groups prior to establishing the SSM on 4 November 2014], the banks are really able to find the equity and funding they need to make loans to the economy. This was only a pre-condition, however, as businesses need to be strong enough to demand those loans and to have projects in which to invest. Second, the SSM also makes a difference for depositors. And third, it makes a difference for taxpayers as well. I believe that we are now far more able to exercise better supervision as we have the best of both worlds: the local experience and expertise of national supervisors, as well as some distance in the decision-making process at the European Central Bank (ECB).
How do you take decisions about banks in the SSM?
Decisions are taken by the Supervisory Board, which comprises 24 members, including five members from the ECB and representatives of all the euro area member countries. Each member around the table has one vote. This means that decisions, for example, on “Deutsche Bank”, “Santander” or “BNP Paribas”, are taken by this Board, and Ingrida Šimonytė [Lietuvos bankas’ Deputy Chairperson] as representative of Lithuania, has the same say in these decisions as the German, Spanish or French supervisors. So national bias – if there is any at all – is much less likely because the representative of the country of a particular bank, who might be its “national champion”, has only one vote out of 24. So you can see that there is distance in the decision-making process.
The grand idea of the banking union is to cut the ties between the national banks and their governments so that taxpayers’ money does not have to be used in times of crisis. Has this principle been implemented?
I believe that once the Single Resolution Mechanism (SRM) [the second pillar of the banking union] is in place in about a year’s time, taxpayers’ money will be better protected. Taxpayers have paid a great deal during the previous crises and this cannot happen again. With the Bank Recovery and Resolution Directive we are now better equipped to make sure that it is the holders of equity, hybrid capital and bonds who pay for the mistakes of banks taking excessive risk. It must be possible to resolve banks in an orderly fashion, otherwise they create trouble for others. We now have all the necessary instruments and I am sure it will make a big difference. So Lithuanian citizens are protected as borrowers, as depositors and as taxpayers. At the end of the day, I think that this is very significant.
Recently, the Swiss franc appreciated significantly against the euro after the Swiss National Bank abandoned its policy of keeping a ceiling for the Swiss franc versus the euro. What risks do these currency fluctuations pose to the stability of the euro area banking system?
Well, this is what we first have to follow and then to assess. We have macro-prudential supervision on top of the micro-prudential supervision [of banks]. We are part of the ECB, which works hard to protect financial stability. At the ECB, we reflect regularly on possible hits to financial stability, which, in some cases, lead to decisions being taken by the ECB’s Governing Council. When an event occurs, such as what happened recently in Switzerland, we immediately assess the possible consequences for the banks.
And what are those consequences?
One is that some big banks may have exposures to hedge funds that had been betting that the Swiss National Bank would never take such a move and that may now face difficulties as a result. We therefore need to know which of the big banks are exposed to those hedge funds; although the amounts involved are probably not significant for the big banks. We also have to assess banks that have made loans to individual or corporate customers in Swiss francs. If borrowers do not have income in Swiss francs, then all of a sudden they will be under stress because what they have to repay now is much more than what they expected at the time they borrowed.
How big is this exposure to assets denominated in Swiss francs in the euro area?
Well, we have to measure it fully and understand it, but I suspect that it is totally manageable.
In Poland, our neighbouring country, bank customers and households have sizeable exposures to mortgages denominated in Swiss francs. Is this an issue in the euro area, too, particularly for the new members from central Europe and the Baltic States?
I do not think that it is really significant. Taking risk is the job of the banks. So some of them might have taken risk in this field. The only question is how they have provisioned for this risk and whether they are sufficiently capitalised.
And you do not see any problems in Lithuania on that issue?
Not so far, but we are still looking into it. Direct effects are easy to investigate because they come first. The second-round effects have yet to be fully measured, but I think they will be manageable.
Lithuania is now part of the Eurosystem, which may provide liquidity to stave off panic amongst depositors if needed. How will this help to keep the economy afloat given that our country faces a quite unstable external environment with the events happening in Ukraine, also the Arab world and the recent sad events in Paris?
As I said, I am just a supervisor and have always been one. I am not in charge of monetary policy. As a citizen I believe that the ECB has done a wonderful job during the past crisis. I am certain that it will go on doing that wonderful job. And it is well equipped to address difficult situations. I think that we are fortunate to be part of the European Union, with the ECB taking care of such delicate situations.
It was reported that four Greek banks had applied for emergency liquidity assistance (ELA) ahead of the critical general election in Greece this Sunday. Does this raise concern that Greek banks may have problems again if the populist Syriza party, which has pledged to end fiscal austerity and renegotiate Greece’s huge public debt, comes to power?
Well, we are only the supervisor. What the election will deliver and what politicians are discussing is all part of the environment, of course. However, we do not have any view on this. Also the fact that Greek banks may ask for ELA from the Greek central bank is beyond our scope. We operate under the principle of separation between monetary policy and supervision. The Supervisory Board deals only with supervision. The Greek banks went through the comprehensive assessment. Any capital shortfalls that were identified have been addressed according to the restructuring plans approved by the European Commission. Now the Greek banks are under some additional pressure. Of course, we are monitoring their liquidity and are ensuring that they are very careful about the kind of assets they invest their liquidity in (i.e. assets that are liquid or that can be used as collateral).
If they cannot cope with this problem, do you see any spillover effects on other euro area banks?
No, I think the tensions in Greece and the Greek banks have lasted for quite a long time now, so the markets, the banks, and people in general are accustomed to such difficult periods. Everybody is equipped to go through this period. So, I do not believe that exposures to Greece and its banks are a matter of concern for the banks of other countries.