Interview with Expansión

Interview by Danièle Nouy, Chair of the Supervisory Board of the Single Supervisory Mechanism,
by Alicia Crespo Cifrián, Expansión,
published on, 13 October 2015

What was the SSM's inaugural year like? Did you find any skeletons in the closet?

We're nearing the end of our first year but it started before, back in January 2014. The in-depth balance sheet study (“Asset quality review”) and the stress tests, which were extremely useful for getting to know more about the banks we were going to supervise, meant we found no skeletons. To be honest, we thought that the first year of the SSM would be easier. Everything had to be done for the first time. We have taken unprecedented decisions. While there's always something new that pops up, we hope the second year will be, if not easier, then certainly more normal.

Why was a single supervisor necessary?

Europe's politicians wanted more Europe and, after such a severe financial crisis, to have a banking union made good sense. That was the catalyst. The high degree of connection between banks, the fact that when banks encounter problems these can be spread to other banks beyond national boundaries, made it even more necessary. And we have a single currency.

Can another financial crisis like the last one be avoided?

That's a promise no one can make. But we will definitely be a tougher supervisor, applying the new regulation rigorously. This regulation allows us to demand more and better quality capital, adequate liquidity levels and, for the first time in Europe, we have rules of governance in line with international standards. There is also the Single Resolution Mechanism, with its Single Resolution Fund. We have very good tools at our disposal. We are now better equipped than ever before to deal with a crisis.

Will capital requirements ever stop rising?

Having sufficient high-quality capital is a requirement that is with us to stay. But the ECB has made it clear in the Basel Committee on Banking Supervision that the reforms must now be finalised. Banks cannot pursue a moving target. They need to know where the finish line is, review their business models according to the new constraints and prepare to meet the requirements. The reforms have been totally necessary, but the time has come to apply the finishing touches and implement them.

The SSM has already informed every bank of the amount of capital it must hold. Is it fair to impose different ratios?

It is totally necessary and appropriate. First there are common capital standards, but then different criteria come into the equation, such as the banks’ risk profile and the quality of each bank's assets. We've done a good job with our methodology to define the capital requirements of the 123 significant banks across 19 countries, making sure we are sufficiently strict and fair at the same time. I'm in no doubt about that.

But you want to keep the capital requirement of each bank a secret. Doesn't that go against the necessary market transparency?

First, let me say that we cannot do supervision under the spotlights. Moreover, while we published a good deal of information after the comprehensive assessment, analysts and journalists did not make much use of it. There was information, for example, on the composition of banks’ own funds, which wasn't much taken into account. Transparency is wonderful, and the more the better, but I don't believe we have to publish absolutely everything we do.

The ECB recommends a prudent dividend policy. When will it give total freedom?

Banks that can afford it already have the freedom. What we said last year was that, if a bank complies with all the current and future capital requirements, it can do what it wants, but bearing in mind that the economic and financial outlook is not great, hence us requesting prudence. At the other extreme we have the banks that do not satisfy the requirements; they are not allowed to pay dividends. Nor are those banks making losses, although there may be exceptions if they are financially sound and have convincing reasons. In the middle are the banks that satisfy the current capital requirements but not yet the full weight of Basel III. These we told to retain enough earnings to cover at least a quarter of the additional capital they need to bring during the next four years, to comply with the 2019 objectives. It is simply common sense. We'll continue to impose restrictions on dividends for the time being, because really we still haven't left the crisis behind. We make recommendations, but obviously we expect banks to follow them. If they don’t we will turn the recommendations into an obligation.

Are you concerned about the low profitability in the banking sector?

We are of course concerned about the low profitability. We assess the sustainability of business models and the profitability drivers, meaning that we expect the banks to be profitable and to have sufficient capital. So far, the main causes of low profitability have been provisioning and loan losses rather than the low interest rates. The negative effect of low rates has been tempered and probably more than offset by the positive effect from the economic impetus and by the resulting improvement in households' and firms' capacity to reimburse their credits. Monetary policy measures are like a medicine; they may have side effects so the patient cannot take it forever. When the patient recovers from the illness and stops taking the medicine, the side effects will disappear.

Will the profitability problem lead to mergers?

There are countries where the banking sector is already highly concentrated and others where there is still scope for mergers. To some banks we say: "Even if you don't have problems, because of your low profitability and limited business prospects, given the strength of the competition we recommend you consider merging". It's something we discuss with banks when we believe it makes sense. But how many mergers and when we'll see them is still too early to assess.

Your inspectors attend banks' board meetings. Are they not interfering too much?

Attending board meetings, making recommendations, warning of risks and about what we see as necessary courses of action may be viewed as excessive interference in some countries. But in a few years, it will be regarded as normal, because it is. The German supervisor has been attending banks’ board of directors' meetings for some time. We don't attend every meeting but we sometimes convey messages to the boards.

What sort of messages?

For example: you need more or better quality capital; get prepared for the new liquidity rules; assess the sustainability of your business model in greater depth; or your corporate governance isn't up to standards...

Some banks' presidents have the power to replace the CEO. Isn't this excessive?

The laws differ according to country. What is important is that supervisors have the power to decide on the suitability of candidates and can refuse candidates on account of their lack of adequate experience or problems they've had in the past. And it's a very good thing that we now have more legal powers to ensure good governance. The powers conferred on us by the Capital Requirements Directive (CRD IV) are significant. .

Bankers' salaries are on the rise again. Can greed be kept in check?

Following the crisis, we have become more sensitive to the issue of compensation packages; they are now subject to greater control. The rules have changed and we are in a better position to prevent abuses. Human nature is what it is, and some cases might be repeated if we are not cautious enough. The tone has to come from the top: banks' boards. A strong ethical culture will make it less likely for abuses to take place.

Banks continue to report problems of misconduct. Do sanctions need to be strengthened?

They are already pretty tough. What we need is more ethics and better internal controls in banks. Supervisors must do everything in their power to ensure that misconduct is increasingly unlikely. But this, of course, is a very difficult task.

What will the 2016 stress test involve?

This is decided by the European Banking Authority (EBA). It will examine 70% of assets by country, some 50 banks for the SSM. We have asked the EBA to consider the SSM as one country.

Will there be any countries in which no bank is inspected?

Yes. This will probably be the case for the small countries.

Will you copy the Fed's stress test?

No. It would require too many supervisors and the cost would be extremely high. We might draw on the Fed's example in the future but, for the time being, it isn't suitable for European banks. In the United States, there are fewer banks and they are very similar to each other. Here, we are dealing with 123 banks of all kinds, and the EBA has set different rules for good reason.

The banking sector is calling for protection from shadow banking and on-line operators.

Our authority is limited to officially registered entities. Something needs to be done about shadow banking, but that isn't our job. We support Brussels' efforts to address its risks and modes of operation. As for their on-line competitors, banks must keep pace with IT developments. The younger generations want on-line banking, which also enables banks to cut their operational costs. On-line banking is part of what banks must offer if they wish to hold their own against the new competitors.

What is your biggest challenge as a supervisor?

It's very difficult to choose just one. Maybe improving the level of non-performing exposures. We have an average rate of 12% among the SSM's 123 banks; this is too high compared with other parts of the world. We're trying to improve the situation by using the experience of Ireland, a country which has already made considerable progress in this area.

What are your thoughts on the default rate of Spanish banks?

The economic recovery in Spain has significantly contributed to improve banks' levels of non-performing exposures.

When José Manuel Durão Barroso was still President of the European Commission, he blamed the Banco de España for the financial crisis owing to its poor supervision of savings banks. Do you agree with this accusation?

No, not at all. It's too easy to blame the supervisors for all the things that went wrong. Such a problem always has multiple causes. The Banco de España has been and is a rigorous supervisor.

Many of its supervisors have been recruited by the SSM.

In fact, there are now more Spanish supervisors in the ECB than German, Italian or French ones, according to our most recent data. Spanish is currently the most common nationality among those working for the single supervisor. This confirms what I've already said: the Banco de España was a strict supervisor. If it weren't so, the Spanish supervisors wouldn't have been so numerous to be recruited. Competition for these positions has been very strong.

What is your view on the Spanish banking sector today?

The Banco de España has done a great job to have balance sheets cleaned up, taking the necessary measures. There's no doubt about that. It had to deal with the real estate crisis, defaults and deterioration in asset quality. To remedy such a situation, one can either require only what banks can afford to do or undertake a thorough clean-up to lay solid foundations, even though this may entail giving some time to phase-in the additional capital requirements. The Banco de España opted for the latter, rightfully so in my view.

What will happen to banks with registered offices in Catalonia?

I will not speculate on matters which are purely national ones and I don't know. No one knows what would happen or what treatment it would be afforded if Catalonia was to declare independence. It's a matter to be dealt with at the European level.

What about the agreement between the Spanish government and Brussels concerning DTAs?

It's very positive, as it brings more certainty and more harmonisation, two words that are music to the ears of SSM supervisors. Also, investors need to know what banks' capital is made up of, and there is now certainty in this regard.