Interview with Handelsblatt

Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB,
published on 1 April 2015

Ms Nouy, the economic situation in the euro area is rather bad: growth is low, interest rates are even lower, and unemployment is high. Isn’t that a nightmare for you as banking supervisor?

Of course we are concerned about that. Our job is easier in a more favourable economic environment. On the other hand, this situation also offers a considerable advantage in that, in difficult times, banks are more cautious and don’t take imprudent risks.

Are the extremely low interest rates not driving banks to take greater risks?

I would only see such a danger if the environment of low interest rates were to persist. But banks are currently more occupied with improving their equity position.

But aren’t the low interest rates already an assault on the business models of many banks?

Of course the low interest rates are a challenge for banks’ profitability because they squeeze the interest rate margin. On the other hand, one should not forget that low interest rates also promote growth in the real economy, which generally leads to fewer credit defaults. Conversely, higher risk provisioning would be detrimental to banks’ profitability. Currently I don’t see any bank struggling to survive just because of the low interest rates.

Not even in Greece? Aren’t some of the banks there in a particularly precarious financial situation?

Greece’s national supervisor has done a good job. The institutions are liquid and solvent. And we are keeping a close watch on this liquidity. We are in daily contact with the supervisors and banks in Greece.

Greek banks should not increase their holdings of Greek government bonds. How threatening is this close interlinkage between the banks and the state in Athens?

There is a general problem with the treatment of government bonds on bank balance sheets. They are being treated as risk-free. During the crisis, however, we learnt that even government bonds are not without risk. Banks should also therefore have to put aside capital for government bonds, as is the case for all other assets.

What would be a good risk-weighting for government bonds?

I’m not looking for a revolution and a particularly high risk-weighting. In many cases, these are good-quality assets. First and foremost, we need to acknowledge that government bonds are not risk-free. Making that clear in the regulation would be a strong signal. And such a signal is more important than the amount of capital required to be held against the bonds.

Should the volume of government bonds held by a bank be limited?

Yes. Large exposure limits should apply to government bonds, as is the case for all other loans. Banks should not lend any one debtor more than one quarter of their equity capital. That would also be a sensible order of magnitude for government bonds. Given that the euro area comprises 19 Member States, banks have enough opportunities to spread their government bond holdings.

Would German banks also then have to limit their holdings of domestic government bonds, although these are probably the safest in Europe?

This is not an immediate issue. But, yes, if such rules were to be introduced, this would be the result.

Are such proposals already on the table somewhere?

The Basel Committee on Banking Supervision has started discussions on the handling of government bonds. The European Parliament may also be open to such proposals. We’re therefore moving step by step in this direction.

Many financial institutions have responded to the new banking regulation by revising their business model. Deutsche Bank, for example, is considering splitting off its retail banking. Has the universal bank model had its day?

I will not comment on individual institutions. But I don’t think that is evidence of the end of the universal bank. I would see it this way: one of the lessons from the financial crisis was the importance for banks to draw up a good resolution plan for emergencies. Part of such a resolution plan can be an organisational change, such as the splitting-up of a bank into various activities. There is a close connection between a good resolution plan and the need for a separation between investment banking activities and deposit-taking business.

And what is that connection?

If the resolution plan is very good, then the separation between investment banking and deposit-taking business is less needed.

Does Europe still need legislation (ring-fencing acts such as the German “Trennbankengesetz”) on separating banks’ trading entities?

Personally, I think what Germany and France have done is very sensible. I would have serious reservations about going beyond that. We should not forget that 80% of the financing for enterprises in Europe comes from banks, and not via capital markets. That’s where we differ from the United States.

Are there any business models you prefer?

Certainly not. Personally, I appreciate the very diversified banking system in Germany. This diversification is an advantage that I hope we can maintain. However, banks must also be profitable, irrespective of which category they belong to.

But precisely on profitability, German banks traditionally have had a hard time.

That’s true. They will have to see whether costs can be reduced further: improvements to IT systems may help and it may be the case that the number of branches would have to be reduced. I am sure solutions can be found. By the way, it is not only in Germany: several banks in my home country are also struggling with profitability.

Recently European banking supervision announced a review of banks’ remuneration practices. Are any results available yet?

Not yet. Before June we want to present some harmonised rules of our own. But we’ve had so many other things to do that we haven’t got around to it yet. The difficult thing is that we are doing everything for the first time. Granted, we’re not starting from scratch, because we are able to take the practices of the 19 national supervisory authorities as a model. We always want to build on the best supervisory practises.

Then the process should actually be quite quick.

Only if we simply select the best model from among the 19 possibilities. If we first choose the best model and then enhance it with good aspects of other models, then the whole thing becomes more complicated and takes longer.

Is there a clash of cultures?

I wouldn’t say there’s a cultural clash among banking supervisors. But in the course of this year and last, we have found that we differ more from each other than we would have expected. On a superficial level, we know each other well from all kinds of international committees. But our approaches are widely diverse. Even when the outcome is often very similar, our paths are often surprisingly different.

Is that good or bad?

That can be an advantage, because it opens up different options for getting something done. However, it may be trying in practice, such as when the coordinator of a Joint Supervisory Team has to reconcile the views of nine ECB staff, 20 national supervisors from a bank’s home country and a few dozen other supervisors from other countries in which the bank operates.

How long will it take before these differences give way to a common culture?

It will take a while.

Ten years?

Not quite as long as that. But we first need to make a start on harmonising the regulatory rules. The EU legislation that transposes the Basel III rules allows for 150 national options and discretions, of which 80% are in the hands of the national supervisors, while the remainder lie with the national lawmakers. Now, in our new role as banking supervisor since last November, we have to decide how we tackle this issue in a rigourous and efficient fashion. It cannot be an agreement on the lowest common denominator.

Do you have any specific examples?

Cases in point are the treatment of deferred tax assets or the different rules for writing off goodwills. However, for such decisions, I need a majority in the Supervisory Board of the ECB, which comprises six of our own people and 19 representatives of the 19 national supervisory authorities.

What role will your authority play in future in investigating and sanctioning misconduct at banks?

A complex issue. We have the powers to address that through governance and internal control rules. But I don’t know whether that will completely prevent misconduct in future.

Perhaps it would help if higher fines were allowed in Europe? In the United States we refer to fines in amounts of billions, here we count them in millions.

I’m not sure that the level of a fine necessarily determines whether misconduct occurs or not. Of course we also need such powers, but the problem begins much earlier on. In my view, it already starts when banks build up a presence in other countries but are then not in a position to impose the same sound corporate culture that they have in their home country.

Might European supervisors be too lenient with their banks? That is at least how US bankers see it.

That’s not the image that US supervisors have of us. What I would acknowledge, however, is that we have not transposed all of the Basel Committee on Banking Supervision’s guidelines into our legislation. In Europe, we should perhaps be more consistent with Basel in the future; after all, ECB Banking Supervision is represented on this committee and also has a say in these rules.

The debate on a possible conflict of interest between monetary policy and banking supervision flares up in Germany again and again. How well is the separation between supervision and monetary policy working within the ECB?

I know that this issue plays an important role, especially in Germany. But don’t worry. As a supervisor I am a very disciplined person. Rules are in place and I will stick to them.

How happy are you yourself, as the ECB banking supervisor, with the ECB’s monetary policy?

I have no mandate to talk about monetary policy and I have never had anything to do with monetary policy. I read about it in the newspapers in the same way as every other European citizen. But I see the ECB as a sound, strong and credible institution in Europe and I am proud to work for it.