European Central Bank
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Interview with Il Sole 24 Ore

Interview with Ignazio Angeloni, Member of the Supervisory Board of the ECB,
published on 4 October 2015, conducted by Alessandro Merli

European banking supervision (the Single Supervisory Mechanism – SSM) will be one year old on 4 November. There has been a momentous change. But is the euro area’s banking system safer?

We have made great strides in this direction. First of all, the comprehensive assessment conducted in preparation for assuming the supervisory role provided an unprecedented amount of information both on banks’ assets and on their sensitivity to stress. And this has already led to measures to strengthen balance sheets. Now we are carrying out the annual review – the Supervisory Review and Evaluation Process (SREP) – which will provide us with information on other aspects of risk and will lead to further capital adjustments. These two steps alone tell us that the answer is yes: today the system is undoubtedly sounder than when we started. For us, of course, the work is continuing: we will further deepen the analysis and monitor banks on a day-to-day basis. We have made progress, but there is still a lot of work to do.

With single supervision but national rules there is still a huge amount of national discretion and options – a problem that you have been working on for months. What do you think you can achieve?

The aim of the single system is to have consistent supervision for the whole banking system, applying uniform rules but without losing sight of different business models and operations. However, there is a need for clear rules that apply uniformly to all, in order to achieve an effective single market for banks. There are several obstacles to this: there are differences in the way rules are applied under national legislation, and European legislation itself makes provision for forms of discretion and differences in application which were deemed appropriate when the legislation was drafted. Until very recently the power to exercise this discretion was held by the supervisors of the individual countries. Now that there is one single supervisor, we have to determine together how to use this discretion uniformly. From a preliminary analysis it emerges that over 150 provisions of European legislation are involved. We are concentrating on those in the hands of supervisors, leaving aside for now the small number that fall within the competence of parliaments. The main issues are the quantity and quality of capital, capital requirements within large banking groups, liquidity requirements, restrictions on large exposures, tax credits (so-called deferred tax assets or DTA), transitional arrangements for unrealised gains and losses on securities, the treatment of banks’ holdings in insurance companies, a number of provisions on real estate market risk, etc. Within the Supervisory Board we have agreed on a harmonised approach. We are currently drawing up the legal text for an ECB regulation, accompanied by an operating “guide” for our supervisory teams, which will be submitted for public consultation in November. The process will take several weeks. There will also be a public session with a webcast on this text. Between the end of this year and the first quarter of next year we must obtain final approval of the whole package, involving the 123 banks that we directly supervise. For smaller banks, there will then be a further step.

Can you provide more details on the DTA issue? This is a major problem for a number of countries, such as Greece, Italy and Spain.

There are two categories which are sometimes confused: the first is DTA – credits built up by banks against losses – the use of which is contingent on future profits; the second, which is sometimes treated as DTA but is actually a different instrument, is a category established by law and does not fall within the scope of supervision. Therefore, we only concern ourselves with the first category, which is, however, widely used in a number of countries, including Italy. The legislation allows these credits to be carried forwards: what we want to do is to harmonise the phasing-out of these instruments in order to have equal treatment. This needs to be a gradual process and we wish to respect that, as well as the legitimate expectations of the banks. The transition will be the same for all and will take place slightly faster than the currently foreseen maximum and in line with the Basel standards. The details will be communicated in the text to be published in November. For all transitional regimes, we will ensure that we provide a clear timetable, which will be as fast as possible but manageable for the banks.

In some cases, the euro area countries seem intent on taking back tasks that were assigned to the European supervisory body. Germany has just stipulated that its Finance Ministry must be involved in the event of any restructuring of banks.

This is a matter of great concern. There is European legislation and national legislation, part of which transposes European legislation into the respective country’s legislation. We are called upon to apply European laws and those national laws that transpose them. The problem is that transposition may create asymmetries and differences. In some cases, including the one you mentioned, some of the component parts of supervision, for example market risks, are reported at the national level – in this case at government level. We explained the reasons why we are perplexed by this case in a legal opinion a few weeks ago. It remains to be seen what reactions result. Up to now we have generally seen allegiance on the part of all countries to the principles of banking union. This is a recent case. But if such cases proliferate, single supervision cannot work properly. It is therefore necessary for parliaments, in the legitimate exercise of their prerogatives, to respect the letter and the spirit of the criteria of banking union: supervision of all prudential matters rests with the SSM.

The introduction of the euro should have led to a cross-border consolidation of banks, which has not happened. Will harmonising the rules make it easier?

In the first two years after the introduction of the euro there were several major operations, some of which were not successful. The crisis brought everything to a standstill. As supervisors, we are not in favour of consolidation as such, nor do we have a roadmap of the future European banking system for which we want to see certain mergers take place. We want to see sound banks which, in some cases, could be achieved through mergers. Fundamentally, our judgement is based on whether a bank’s position is viable as it stands. Banks bring proposals to us and we must assess and authorise them. But proposals do not come from us; management autonomy in this regard should be respected.

Sources in the industry view your supervision as more “invasive” than the previous system, with a risk of usurping territory that ought to be the province of the managers and shareholders of banks. This was the case for Banca Monte dei Paschi di Siena: it was reportedly suggested to the bank that it should seek a partner.

I hope that the new system of supervision is regarded as more “invasive” if this means requesting more relevant information, analysing in greater depth and gaining a better understanding of all aspects of risk. From this perspective, we encourage supervisory teams to be more rigorous in their analysis. I know that banks sometimes complain about receiving more requests for information, but these are fundamentally a positive thing. Interfering in management, particularly in strategic operations, is a different matter. It could be said that, in some respects, the situation of some banks as it stands today is not sustainable. If there are overlaps or excessive costs that could be eliminated through rationalisation, which could also entail a merger to strengthen the system, we could suggest that, but in general terms, without stating specific objectives. Again, we do not have any roadmap of mergers.

The Italian government has launched a reform of the “banche popolari” (cooperative banks) which should encourage them to merge, but in some cases there have been delays in their conversion to public companies limited by shares (“società per azioni” - SpA).

We take a positive view of the Italian government’s reform and we hope it is completed soon. Some banks are making faster progress, while others are slower. Conversion to an SpA will foster competitiveness and make banks more transparent. This is a first step. It remains to be seen what developments this reform will bring. The possibility of market overlaps and inefficiencies in some parts of the cooperative banking sector opens the way for possible merger operations. We will assess them on a case-by-case basis, from the perspective of the soundness of the company, in collaboration with the Banca d’Italia, and the final assessment will be the responsibility of the Supervisory Board.

You are completing the SREP. What are the main findings?

This is a very important tool for examining the various sources of risk in a bank. The methodology that we have developed is a world leader in some respects. It has a very rigorous quantitative component and a qualitative component based on assessment by supervisory teams. Thus, there is also a component that relies on the non-mechanical discretionary judgement of the supervisor. The ongoing dialogue with the banks is very constructive. The details of this process are not made public, in accordance with international supervisory practice. However, I am sure that the results will make a significant contribution to further strengthening the system.

According to various sources, the SREP should not spring any negative surprises on Italian banks. Your colleague, Sabine Lautenschläger also said as much the other day in Milan.

We have daily meetings with the banks, so the final verdict will not come as a surprise. In the vast majority of cases, there is a convergence of opinions between us and the banks. In Italy, much of the fact-finding was achieved in the comprehensive assessment conducted last year, which revealed situations requiring close attention and a strengthening of capital. This has been done. The SREP takes account of the latest risk factors and, naturally, the most recent developments.

Your observations to banks are disclosed only in Italy, at the request of CONSOB (the Italian Companies and Stock Exchange Commission). This increases transparency but can give the impression that all the faults in the European banking system lie in Italy. Shouldn’t this be harmonised too?

It is not up to us: the disclosure requirements for information of relevance to the market are issued by the national market authorities. Coordination is the responsibility of the European Securities and Markets Authority (ESMA). The asymmetry can be a problem, but it is not up to the supervisor to intervene. We have a regular dialogue with ESMA. We believe that some parts of the SREP process should remain confidential. In particular, information which is incomplete and premature, and could therefore potentially be misleading, should not be disclosed because it might otherwise have an adverse impact on the market. Information that is incomplete, before the final results are obtained, for example in the case of the SREP, could contribute to destabilising the market. When the comprehensive assessment was carried out last year we took great pains to publish all the final results at the same time.

You already have a new stress test scheduled for 2016.

This is an exercise by the European Banking Authority (EBA) which is repeated at regular intervals. But the asset quality review will not be repeated on this occasion. This review was required under the regulation establishing the SSM. This time we will be relatively more reliant on the EBA’s findings. It remains to be seen which banks will be included and what scenarios will be drawn up by the European Systemic Risk Board, on the basis of the Commission’s forecasts.

One criticism levelled at you is that through more stringent capital requirements you run the risk of hampering the economic recovery which the ECB’s accommodative monetary policy seeks to foster.

I see it differently. We started with an undercapitalised system before the crisis. It was essential to make it capable of more and better lending without jeopardising the recapitalisation too much. If anything, the relatively loose monetary policy conditions at present allow us a certain space to complete this process. There is currently no inconsistency between monetary policy and supervision. Moreover, we are in a phase of economic recovery, albeit with all the attendant uncertainty, and therefore also from a cyclical point of view achieving a stronger balance sheet at this point in time is not a mistake. In the long term there is consensus on the fact that stronger and better capitalised banks improve lending. However, looking at individual situations, we are very careful not to make requests that are not achievable or that would cause difficulties for companies.

Banks are reluctant to lend partly because of the burden of non-performing loans. This is a serious problem in Italy, where the government has proposed the creation of a bad bank.

This was done successfully in Spain, so the measure itself is worth considering. In Italy a measure has been put in place which helps to make portfolios of non-performing loans more tradable. I have also seen some loan sales recently in the market; some banks are taking independent action and this is a step in the right direction. The problem of bad loans is real, and does not only affect Italy. Levels of non-performing loans are very high by historical standards. We are looking at the proposal from the perspective of the soundness of business; it is up to the Commission to look at the aspects of competition and state aid. I don’t wish to pass comment on this aspect. With regard to the prudential side, these loans are removed from bank balance sheets, providing respite on the asset side and enabling new exposures to be created, but at the same time removing them from the balance sheet should not have too onerous an effect on the bank’s capital. From our point of view, the more the banks are able to lighten the burden of these loans, the better.

You are also conducting a new test of Greek banks that are to be recapitalised under the third package of aid for Athens, which was agreed in July.

One year ago the Greek banks were in relatively good shape. They had been assessed and recapitalised. There was a recovery, including in economic terms. What followed did not help. We are repeating that exercise and calculating what new injections of capital are necessary. Some of the funds in this package are intended for the banks. We are calculating what is necessary to safeguard each of the four large banks that we directly supervise. We hope that the whole process will be completed by the end of the year. Our input will be ready within weeks.

As highlighted in the Five Presidents’ Report, the European banking union lacks a common deposit insurance scheme, but there is fierce opposition to such a measure.

We are convinced that a well-built system should include a deposit insurance scheme as part of a four-sided set-up that includes single supervision, clear regulation and an effective bank resolution system. The European resolution system takes effect in January. Supervision and regulation are in place. The “fourth leg” does not exist at the European level, and controversy surrounds its implementation. For now, the system works anyway, but to make the system safe there is a need to proceed with the completion of banking union in this direction, too. Some argue that further clarity should first be achieved on legacy assets, which in many cases are still on banks’ balance sheets. We do not share that opinion; the steps already taken with last year’s tests and now with the active presence of the SSM already provide ample guarantees for setting up, within an appropriate time frame, a European deposit insurance scheme too, as proposed in the Five Presidents’ Report. Naturally, further progress on supervision and improving the health of the banks will also facilitate the solution to this problem.

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