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Danièle Nouy: Interview with Welt am Sonntag

Interview with Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism,
published on 7 June 2015

Of the 123 banks that are under your direct supervision, only four are located in Greece. How much of your time is taken up by this small group?

The Greek banks take up the time that is usually needed for supervising an institution. But given the situation in their home country, these banks are of course going through a difficult time.

Meanwhile you may perhaps have slight doubts about your earlier statement that Greek banks were absolutely solvent and liquid.

No, I don’t: these banks continue to be solvent and liquid. The Greek supervisors have done good work over the past years in order to recapitalise and restructure the financial sector. That was also visible in the outcome of our stress test. The Greek institutions have experienced difficult phases in the past. But they have never before been so well prepared for them.

On multiple past occasions you have criticised the practice of counting deferred tax assets as capital. Perhaps you are concerned that these make up more than 40% of capital precisely at Greek banks.

That is not only a Greek issue but a general problem.

But it is especially virulent in Greece – because it’s only the accounting trick with the tax assets that is saving the banks from failure.

Deferred tax assets are certainly not high quality capital that can fully absorb losses. But we are now in a transitional phase, in which new capital rules are being introduced. When this has been completed, part of this problem will be fixed. But that requires a global approach.

The Greek banks have been on a drip-feed from the central bank for months. But the central bank may only give emergency loans when the institutions are solvent. Who at the ECB decides whether that is still the case – you as supervisor or the ECB Governing Council around President Mario Draghi?

Monetary policy and supervision work in strict separation. We have different staff and are located in different buildings. We share access to data and work closely together in the field of financial stability. Otherwise, we only inform each other about facts of cases for which it is absolutely necessary. When it comes to monetary policy decisions such as emergency loans, it is therefore up to the ECB Governing Council to decide on which banks it classifies as solvent. We carry out our own examination independently.

That sounds extraordinary. What would you do if one ECB board still classified the Greek banks as solvent and the other one didn’t?

That is a hypothetical question that I will not answer. I simply do my supervisory job and send the results to the ECB Governing Council.

That does not change the fact that conflicts of interest are looming. The ECB Governing Council must agree to all of your supervisory decisions. But these decisions could have direct consequences for the central bank as the largest creditor of the Greek banks.

I have worked in supervision for forty years, and in France, too, supervision is under the same roof as the central bank. This supposed conflict of interests, which some people repeatedly fear, is something I have never experienced.

The bringing together of banking supervision and monetary policy under the ECB’s roof was originally conceived as a transitional solution. In the long term, would you like to see a complete separation of decisions on monetary policy and banking supervision, as called for by the ECB Executive Board member Sabine Lautenschläger?

I could permanently continue working as we do now and don’t need a complete institutional separation. But I may be biased as I’ve been used to working this way in France. Just like Sabine Lautenschlaeger, who is familiar with the strict separation of supervision and monetary policy in Germany, has therefore probably been influenced by her different experiences. I think good supervision is possible under both regimes.

Monetary policy, in turn, has an impact on the banks’ situation. Are the institutions, despite low interest rates, still sufficiently resilient to survive economic crises?

As I see it, the institutions are now suffering mainly from the large holdings of impaired loans. They are of course also under pressure from the low interest rates. But these have a good side too: they promote growth; enterprises and households are better off and banks’ credit risks improve. What happens next depends on how long the phase of low interest rates lasts.

When could the low interest rates become dangerous for the institutions?

That is not foreseeable in the current situation. But it’s just as with any medicine: if you are sick, you should take it. But, if you take the medicine for too long, the side effects will outweigh the benefits. All in all, I see the crisis as a great opportunity for the institutions to reflect on their business models.

Are you referring to German institutions in particular? They have traditionally not been very profitable, also because the market is strongly fragmented.

As supervisor we do not decide on the banks’ business models. But we welcome the varied banking landscape in Germany, provided that each bank, in its category, has a sustainable and profitable business model and has sufficient capital and liquidty available.

Small banks in Germany think that ECB supervision poses a threat to precisely this variety. Savings banks and cooperative banks fear that they will be subjected to the same standards as large banks.

But that is not the case. We only directly supervise the 123 significant banks. In the case of the smaller banks, we simply ensure that they are supervised in line with the same regulations. In doing so we are constantly aware of the relationship between the size of a bank and the extent of control.

But SSM representatives have definitely announced that they want to take a closer look at smaller banks too. What will that look like in practice? A “stress test light”?

The comprehensive assessment of the larger banks last year was a very valuable exercise. However, we have no plans to conduct similar tests for the smaller banks. We are only looking more closely at those institutions that are almost large enough to fall under our direct supervision – i.e. those with a balance sheet total of just under EUR 30 billion. So the smaller banks need have no fear about a revolution in supervision.

Will there be another stress test for the large banks this year?

No, there will be no such test this year. But we are of course continuously carrying out smaller, targeted tests with a focus on particular risks. Whenever we ask banks “What would happen if…?” it is a type of stress test. A general, public stress test will be held again next year. But this may well cover fewer than the 123 banks under our direct supervision.

You also intended to take a closer look at banks’ internal risk models this year. How far have you got with that – and to what extent have you been shocked by what you have seen up to now?

What was shocking to begin with was the number of models: at the banks that we directly supervise there are 7,000 different ones in use. So, if we were to look at all of those individually without external support we would probably need ten years. So we need to prioritise. We will start with the banks that markedly understate their capital requirement through the use of their models; our aim is to find out whether that is justified or whether the parameters need to be adjusted. I am optimistic that we can achieve a good result within two years with some external support. In the long run it would be desirable to reduce the number of models – that is why I welcome the discussion on this issue in the Basel Committee on Banking Supervision.

Did this shocking number of models also increase your liking for straightforward key ratios, such as the widely discussed leverage ratio?

The leverage ratio should only be a safety net that ensures a certain minimum holding of capital. The ratios have shifted in recent times: the banks are often more constrained by the leverage ratios than by the risk-based capital ratios. That is not a good development in my view.

What bothers you in that respect?

In Germany, say, many banks have an extensive retail banking business that is sound and stable, but not very profitable. That is often accompanied by a relatively large balance sheet, but rather low risks. Why should we call this business model into question by introducing a high leverage ratio. The capital requirements, that are tailored to the business risks, should remain the decisive factor. That is more complex; but simplistic criteria will not get us anywhere.

So you would be opposed to increasing the prescribed leverage ratio from 3% currently to 4% or 5%?

The leverage ratio should not be a moving target. A certain ratio was decided. This rule should first be implemented, which will take until 2018. If it later turns out that this was not sufficient, then, as far as I am concerned, it can be readjusted.

Your statement will please the heads of Deutsche Bank, to whom the “total debt” target causes a major headache.

Possibly, but I don’t see it as my task to please or displease certain people.

You may once again annoy them with yet another issue. Your institution also wants to look at the banks’ bonus policies. Are there any results on this front yet?

We can’t do everything at once. After all, we are doing everything for the first time this year. We intend to look at remuneration as of June or July. Until then we are building on the previous good work of the national supervisors we are not starting from scratch after all.

Do you still feel you are in the start-up phase?

No, we have now completely grown into our role. The start of European supervision was an unprecedented task, but we are already a “game changer”. Markets have more confidence in European banks than before. And let’s not forget: Europe now has 1,000 additional banking supervisors. That alone should raise the quality of supervision.

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