Interview with Börsen-Zeitung

Interview with Ignazio Angeloni, Member of the Supervisory Board of the ECB,
published on 26 September 2015

Mr Angeloni, the ECB has spent months looking at options and national discretions in banking regulation in order to harmonise them. The EU Capital Requirements Directive contains no fewer than 155 in total. Who actually came up with them all?

The Capital Requirements Directive (CRD IV) and Capital Requirements Regulation (CRR) are very detailed and complex legal texts; they are the outcome of a long negotiation process involving all Member States of the European Union. With texts such as these, it is only natural that there are still some elements of flexibility and even ambiguity. However, these elements need to be clarified and made more precise when the norms are applied. This is what the SSM is doing.

Is it true what is said, that exemptions can primarily be traced back to the large EU countries because they have the necessary political influence, while for smaller countries there are fewer banks to protect, in part because many of them are foreign subsidiaries?

This question would be better addressed to a politician. What I can tell you is that the cases we have analysed are relevant for both large and small countries.

Can you name some options and discretions which manifestly only serve a country’s aim of protecting the interests of certain banks?

I would prefer not to. In our work – which is still ongoing, since we have yet to conduct the public consultation on the legal text – we have been objective. Instead of speculating about intentions, we have been focusing on concrete and prudent solutions, which are in the interests of all Member States and effective single supervision. At certain stages it was relatively complicated to reach an agreement, but in the end all major points were resolved in the context of an overall package. The national supervisors have been very cooperative throughout the process.

How are you resolving them?

As a first step, in cooperation with the national supervisors, who are represented on the Supervisory Board of the ECB, we compiled a list of the options and discretions in the CRD IV and CRR. There are around 160 of them. However, of these, up to 40 are not applied by the supervisory authorities alone. Rather, they are in the hands of either the governments or the parliaments of the Member States. We can’t intervene directly and autonomously there.

How do you want to proceed in these cases?

We’re not addressing the second group at the moment. Harmonisation in that area will require cooperation between the Member States. We will need input from the European Commission and, in certain cases, there will have to be intervention at the legislative level. This is something we only want to address in the second stage. What’s on the table now is an agreement between the ECB and all national supervisors on the Supervisory Board on the options and discretions which we can influence regarding the 123 banks which we supervise directly. Of course, there is also the large group of less significant banks, and these options and discretions are also relevant for them. That is another step, which we want to take at a later stage in order to standardise the methodology for both types of bank.

What happens now?

We’re preparing a formal legislative text and we will consult the industry on it very soon. Then we’ll have to see what sort of comments we receive. In any case, I am expecting some adjustments to the draft, but hopefully they will not be major ones.

Presumably you can expect opposition. Why should a bank be in favour of abolishing a discretion which benefits it?

Absolutely. There may be some resistance from banks. We will take their assessments very seriously, as we always do, but I trust they will understand that we have to maintain a level playing field in the supervisory treatment of all banks. We will find the right balance.

How long will this process take?

The technical steps for the public consultation require two to three months; the approval takes another one to two months. I hope that this package will be operational in spring next year. If it happens by April, this harmonisation will have taken us exactly one year, which would probably be a record.

What will happen before then with the national options and discretions?

In the meantime, banks continue to transmit to us requests they have regarding exemptions from rules in conjunction with options and discretions. In the interim we will apply the new framework as it is, but we will explicitly explain to the banks that the principles behind these exemptions could change in a year’s time.

Which areas have a particularly large number of exemptions?

There are different areas: for example, recognition of deferred tax assets…

…such as in Greece…

… which naturally has an impact on capital. Certain others refer to the quality of the capital. Some are about liquidity, and especially the possibility of banking groups that work in different countries allocating their liquidity within subsidiaries, across borders, and within the parent company. Other exemptions refer to large exposures within a group.

…such as in the case of Sparkassen [savings banks]…

Sparkassen operate largely within national borders. But liquidity and large exposure requirements also apply– and this is very important and very sensitive – on a cross-border basis, namely as to the extent to which subsidiaries of banking groups which are established in several countries can lend money to, or borrow money from, the parent company. This is related to the degree of protection which can be exercised within a group across different units. There is a similar situation with regard to business structure – this is perhaps the example of the Sparkassen which you mentioned. You have a group and an institutional support framework with certain rules with regard to limited support within the group. We have conducted in-depth discussions on how to treat liquidity and intra-group exposures as well as exposure limits. Another important question is how holdings in insurers are treated.

Now the “Danish option” comes into play.

Prudential considerations suggest that banks should deduct their insurance holdings on the banking side from their capital, in order to avoid a double counting of capital. When banks organise themselves as conglomerates, they can assign risk weights to insurance holdings instead of deducting them. Since this risk weight is quite low, this leads to an advantageous result with respect to the bank’s capital.

Where is this option in force and where not?

There is a 50/50 split. In France, for example, the banks do not deduct these holdings. The discussion about the insurers isn’t just complicated because it’s very technical and concerns accounting – it’s also difficult from a conceptual point of view. This is because supervision of conglomerates first has to be developed further to a certain extent.

So is it even possible to create equal opportunities when there are still around 40 exemptions in relation to the EU Capital Requirements Directive that you won’t be able to change for the foreseeable future?

That’s a legitimate question. There are no perfect solutions, and certainly no immediate ones. We looked first at the 120 or so options and discretions that are quantitatively relevant and on which the SSM can intervene. Owing to the number of Member States, the legislative process does, of course, need more time. However, we have already spoken to the European Commission and the European Banking Authority about gradually initiating these further steps.

Is it still on the agenda in the long term?

Yes. It’ll take longer – how much longer remains to be seen.

Which options and discretions have the greatest significance, then?

As I said earlier, the rules on insurance activities and large exposures, as well as the liquidity and capital ratios. They are all really important for how the banking union will work. And we have concentrated our work on them in order to find a solution there. But there’s one thing that mustn’t be forgotten: the banking union hasn’t just been introduced for supervisory reasons, but also to enable integration of the banking market in order to make it possible for large banking groups that operate across borders to compete globally with the giants from the United States and elsewhere. The additional flexibility that we will allow them in liquidity management and large exposures will, in turn, allow them to work more efficiently and be free to choose between different organisational models.

That means the end of the national ring-fencing of capital and liquidity.

Exactly. No more ring-fencing – except, I would add, for well-understood prudential reasons. The direction of the legal text is clear: openness and less ring-fencing. However, there will be limits, here and there, in order to ensure that banks are safe. After all, there are legitimate concerns, particularly in countries in which foreign banks operate. If there were total freedom, the parent company could manage its liquidity in a way that would be detrimental to stability in that country. In some cases, the transition to a more open system will need to be gradual.

So more flexibility for UniCredit, too, which in the past wasn’t able to transfer capital and liquidity from its subsidiary HVB to its home country as it wanted to because of the German financial supervisory authority.

Large banks that operate across many countries will see that they will get the opportunity to work more efficiently within the group, as long as they meet the supervisory requirements.

Of the 120 exemptions that you can eliminate…

…we’re not eliminating them, we’re deciding in a harmonised way whether to exercise these options and discretions or not, in a way that is equal for all. Some of them will be exercised.

How many of these exemptions are reasonable, then?

A good number of them, for example the rules that allow a gradual transition to the new prudential standards. Their purpose is not to take specific national features into account, but to ensure a smooth transition from Basel II to Basel III.

In many countries, however, national options and discretions are justified not by the need for a smooth transition, but by specific national features. What do you think of that? Isn’t every nation specific in its own way?

The need to balance harmonisation and national specificity exists with most European policies. We want to respect national features when there are good reasons for them. Think about banking models, for example: we as supervisors aren’t biased towards or against cooperatives, limited companies or various forms of management – that’s not the issue for us. What is crucial for us is that the banks’ business and governance models are sustainable. That also goes for the options and discretions. If a specific national feature is well-founded, secure and sustainable, if it helps the economy of the country or the European Union, that’s fine. The concept isn’t that each country is the same or everything has to be the same, because it never will be. We are prepared to accept different models, provided they comply with prudent supervisory criteria. As supervisors, we are open to diversity, within those limits.

This leads us to the million dollar question: what is your attitude towards the Sparkassen and their group privileges as far as intra-group assets are concerned, for example? Is this a reasonable exemption?

It would be premature to go into great detail now. If these banks are competing with other banks in the same field, there has to be a level playing field. In most cases, there is. If their treatment meets the supervisory criteria and is justified in the light of the services they provide to their customers, who may be specific customers – very small firms, for instance, or a certain category of private households and debtors – then why not? You have to find a balance. There are no easy solutions and certain market arrangements cannot be changed abruptly. But if you gradually bring more competition into the system, you can see how the system adapts. You want gradual changes and, ultimately, movement towards a level playing field.

Does that mean you’re planning a gradual end to national options and discretions?

Yes. In many cases, we’ve decided to maintain certain transition phases. We were, so to speak, a bit more tolerant towards the transitional arrangements than the special arrangements permanently in force, as the duration of the transitional arrangements is normally relatively short. We’re talking three or four years. In respect of the exemptions permanently in force, we need to be a bit stricter.

Looking at Germany, you could currently get the impression that, at the same time as the ECB is attempting to limit national options and discretions, governments are wanting to create new exemptions, i.e. in that the German minimum requirements for risk management and for restructuring plans, which have the status of a recommendation, should be transposed into a regulation adopted by the German Federal Finance Ministry, which the ECB would have to take into consideration.

Yes. There is a risk of national legislators entering, and interfering in, the field of supervision. If this practice were to spread it would undermine the banking union. The prerogatives of national legislation need to be exercised in a way that conforms to the letter and the spirit of the banking union.

Do you see a general trend that individual countries are increasingly going it alone and thus counteracting your endeavours to achieve harmonisation of options and national discretions?

Yes, I see this danger. We have seen this in a few cases, and this gives cause for concern.

And for this reason you would like these provisions to be repealed?

Laws cannot be repealed by banking supervisors. This is exactly the difficulty here. Ultimately, however, the overall framework of banking rules must be coherent. Otherwise the system does not work. To achieve this consistency, we depend on the cooperation of the national authorities and the coordinating role of the European Commission and the EBA, with our support.

That sounds like a massive grey area.

Yes, it is a bit. But we should not be discouraged. The commitment of the Member States to the project, and that includes Germany, is not in question. It is now rather a matter of sitting down together, interpreting the rules in the right way, and then proceeding.

Germany also seems to be going it alone as regards the ECB’s project for a credit register called AnaCredit. While the ECB wants to include loans of more than €25,000, the Deutsche Bundesbank apparently wants all claims included, with no minimum amount. Why?

That’s a question for the Bundesbank. We at the ECB think that the threshold of €25,000 strikes a good balance that is appropriate for the euro area.

What is the purpose of AnaCredit in the ECB’s view?

AnaCredit is potentially a very useful instrument. Supervisors need a shared database such as this in order to carry out their work more efficiently. However, there is a conflict between the granularity and the efficiency of such a database. It’s basically a matter of balancing costs and benefits. The banking industry, including via the European Banking Federation, comes to us and says that it already has a series of other requirements to deal with. So we have to find a balance. And we still have to solve certain technical problems.

Which problems?

We need to set the right threshold and the right level of granularity for the statistics that are collected. More detail means more information, but also more costs. The threshold of €25,000 is deemed important for monitoring credit granted to SMEs. There is another problem, of both a technical and legal nature: the question of whether the identity of the borrower will be revealed. The solution will be to not disclose the information gathered, but disclose it only among central bankers, including supervisors. It should be noted that only the names of legal persons will be collected, but not those of natural persons.

The planned disclosure of borrowers’ identities is causing concern as regards data security. How do you plan to ensure data security?

Most data that we keep here for supervisory and other purposes are confidential. This is nothing new for the ECB, and I know of no significant case where this has been breached. Among the banks, there is, for understandable reasons, a certain hesitation owing to the confidentiality of the data to be reported, since these could potentially reveal how creditworthy a given firm or individual is. But that is the whole point of the exercise. Supervisors must know whether borrowers are creditworthy or not. I think that we must therefore insist on collecting, over time, as much information as possible in these data series.

This year was the first time the ECB had sole responsibility for the Supervisory Review and Evaluation Process of the banks, without relying on input from national supervisors. What are the main findings?

I don’t think I can give a specific answer to that.

You can give a general assessment.

At the global level there is, following the crisis, a trend towards more strongly capitalised banks and more stringent prudential requirements. This is justified at the global level and should be happening in Europe as well. This trend must, however, be compatible with the wider macroprudential picture and the need to maintain the competitiveness of Europe’s banking sector. The SREP needs to keep an eye on all of this. I think we will achieve a good balance, even though we will not make everyone happy with the results.

Did the worry about possibly stifling the economic recovery with strict capital requirements have an impact on the outcome of the review?

Every year the SREP focuses on the risks specific to each bank. Macroprudential buffers are a separate component of the overall capital requirements. However, since the SSM and ECB are a macroprudential as well as a microprudential supervisory authority, we have to look at the overall picture. In Europe we are undoubtedly in an economic recovery phase at present. So if a bank wants to build up a stronger capital base, then it makes sense to do it now.

Can it be concluded from efforts to not demand too much of banks that the ECB would rather increase the SREP ratios more quickly but will now spread this increase over several years?

I don’t want to anticipate the results of future exercises, in part because it’s very difficult to determine such an end point. Neither do I want to convey the message that we will keep increasing the ratios – this is not necessarily the case. Next year there will be a combination of new factors affecting the capital requirements: the SREP, the systemic risk buffers for large banks and, to some extent, our new policy on options and discretions. When these elements are phased in, we will have a more stable environment.

Will German banks be in a tight corner when they receive the letters from the ECB with their individual capital ratios?

I don’t think this will cause any bank to be in a tight corner. In the vast majority of cases, the individual capital ratio is the result of a dialogue which has taken place in the months beforehand. So there should be no major surprises. In some cases we might have to discuss certain problems. Then the banks can contact us, we will give them an answer, and in the end the SSM makes the decision.

Why will the results not be published?

At present, the prevalent supervisory practice is that individual requirements are not disclosed, so as to maintain an open and efficient dialogue with banks. We will see how this develops. Other public policy areas, like central banking for example, have seen a tendency towards increased transparency over the course of time. Moreover, we are facing a degree of pressure for publication from some Member States.

Are you talking about Consob, Italy’s stock exchange regulator?

There is indeed a level playing field issue there. Market disclosure practices should be internationally consistent, but this is far from being the case at present.