Interview with Corriere della Sera
Interview with Ignazio Angeloni, Member of the Supervisory Board of the European Central Bank,
conducted by Federico Fubini, published on Friday, 11 December 2015
What was your reaction when you first heard an investor took his life after losing his life’s savings in the resolution of Banca dell’Etruria?
We are all shocked and saddened by the tragic event of which we read in the Italian press yesterday. I think I interpret the feeling of all my colleagues here in the ECB by saying that this must and will become for us a further stimulus to work as hard as we can, in our role as supervisors, to ensure that banks are ever more safe, reliable and transparent for all people that entrust their savings in them. Within our mandate, this is the best way to help prevent events like these from happening in the future.
The latest Supervisory Review and Evaluation Process (SREP) exercise is being wrapped up. How do you assess the overall stability of the European banking system coming out of the Great Recession?
Major progress has been made in this exercise. Let me focus on this briefly. For the first time, we have used a new methodology to assess bank risks and to apply consistent prudential requirements to those risks. We have done this consistently across all banks in the Single Supervisory Mechanism (SSM) area – a major challenge, required by our mandate as European supervisors. The new methodology is in line with the best international standards. We have conducted a transparent and constructive dialogue with the banks. This combines the need for a strong capital base of the system with that of avoiding any undesired effects on credit markets. At the end of this exercise, both the SSM and the banking system are stronger and in better condition than before.
But this is not all that counts nor is it the end of the story. We should look ahead. The system is still characterised by low profitability and by an excessive volume of non-performing loans. There are also specific areas of weakness, on which we are working in collaboration with the national supervisors. So, while we are out of the “Great Recession”, as you called it, we are not yet out of all consequences of it. We need to continue our work and remain vigilant.
Banks that are below the new, increased SSM regulatory minimum have to stop paying dividends, coupons etc. The ECB has come under fire for changing Common Equity Tier 1 (CET1) requirements too often and setting up ever new rules, with a tightening effect on credit. How do react to such criticism?
I think that the international reform effort aimed at strengthening the financial system after the crisis is coming to an end. Major reforms have been made, led by the Financial Stability Board and the Basel Committee, to globally improve the quality of supervision, strengthen bank the balance sheets and reduce the probability and cost of potential banking crises.
In Europe, this has led to an entirely new system of supervision and resolution. The end of this work will permits us to look forward to a more stable regulatory phase, in which banks and all their stakeholders will be able to adapt to the new environment. As regards our supervisory stance, and as I have already mentioned, we are confident that the moderate increase in our requirements regarding high-quality capital (CET1) decided in the context of the SREP will not affect negatively the credit mechanism.
The ECB is both a micro-prudential and a macro-prudential authority, and has the instruments and the information to ensure that such risk is avoided.
Is the ECB launching a new round of inspections among Italian Popolari banks? Does it intend to ascertain capital increases in 2014 took place according to the rules?
The ECB conducts, in close cooperation with the national authorities, a continuous activity of on-site inspection of all banks under our direct supervision. The priorities and calendar of this work are decided well in advance and follow criteria that are based on potential risk, on the need to examine specific weaknesses or other aspects of interest, and are also based on a rotation criterion to ensure a good coverage of the whole sector.
The cooperative sector, not only in Italy, is part of this work. In relation specifically to the Italian “popolari”, we fully support the initiative taken by the Italian authorities to transform the largest institutions into joint stock companies. We are now following, within our mandate and in cooperation with the Banca d’Italia, the statutory and organisational changes that accompany this transformation.
Burden sharing was recently applied to equity and junior-bond holders of four Italian banks. Now small savers are claiming compensation and the government is setting up a fund to partially refund them on “humanitarian” grounds. It is up to the Commission to assess whether this measure is compliant. What is your own take on these developments?
The resolution of the four banks in question, none of which falls under direct ECB supervision, was executed by the Italian authorities together with the Commission. The ECB was involved in authorising the creation of the “bridge banks”. Operations of this type require authorisation of the Commission under state-aid rules. Next year these rules will change, becoming relatively stricter, as a result of the full entry into force of the Bank Recovery and Resolution Directive (BRRD). The BRRD, which was adopted unanimously by all EU member states in May 2014, contains burden sharing provisions that go beyond junior debt.
It should also be said, however, that both the existing state-aid rules and the BRRD contain foresee derogations in cases of excessive impact or risks for financial stability. It is evident that the existence of bail-in rules requires that investors are adequately informed about the risk they take ex-ante, i.e. when they invest.
In some case, the existence of these provisions may make the instruments in question suitable only for professional investors and asset managers. Regarding the refund plans you mention, sufficient information to make a judgement is not yet available, and in any case the issue is not of competence of the banking supervisor.
On a personal basis and as an Italian citizen, I feel a strong sense of solidarity with the persons involved, and consider the humanitarian reasons you mentioned well grounded.
More generally, are you concerned that a strict application of bail-in rules might unduly prevent bank restructuring, or trigger bank runs by panicked depositors?
One should distinguish between normal conditions and crisis situations, especially when the crisis can become “systemic” and involve other banks and the whole system. If introduced in normal conditions, and – let me stress this aspect – if the existence of bail in rules is well understood by investors and properly accounted for in their decisions, bail-in provisions can be helpful as they increase the investors’ awareness of the risks they take. In this way, the potential costs and risks for taxpayers are reduced. Taxpayers are not on the same footing as investors, because they are not aware of or responsible for the risks banks and their clients take. Investors, if properly informed, are aware of such risks.
The state-aid rules and the BRRD were introduced in 2013 and 2014, when the major banking crises in Ireland and Spain were in the process of being resolved and general financial conditions in the euro area were much improved. Conversely, in crisis situations or in tense market conditions, bail-in provisions entail a risk. In order to avoid undesired systemic consequences, especially in the transition period but also in the new regime, both the state-aid rules and the BRRD foresee exceptions to the bail-in rules, if there are risks to financial stability.
The exceptions are for the Commission (DG Competition) and the resolution authority to judge, on a case-by-case basis. I can only stress that they must be applied with full understanding and awareness of all the potential risks involved. Let me also add, in passing, that the focus of the competition authority should be broader, and not limited to state-aid concerns. Proper attention should also be devoted to banking market structures, from which obstacles to market competition can also derive.
Italy is trying to devise a mechanism to rid banks of non-performing loans (NPLs) but it can’t, so far, without running into a state-aid procedure and potential bail-ins across the banking system. How would you address such a case of market failure?
As I have already said a number of times, I myself and we at the ECB support the plan of the Italian authorities to separate, via an appropriate scheme, the relevant categories of NPLs from the banks’ balance sheet, as a means to strengthen those balance sheets and to facilitate the recovery of credit markets and the economy – recovery that, in any case, is already underway. We at the ECB are not involved in the discussions on the modality of such a scheme: the parties involved are the Italian authorities and the European Commission (DG Competition, again). The role of the Commission is to evaluate the impact on competition in the single market – not only state-aid, as already said. We are looking forward, hopefully, to a positive outcome of those discussions.
Regarding NLPs more in general, the ECB is stepping up its involvement. Already in the broad assessment of last year that we did before starting our responsibility as supervisors, we used new methodologies and approaches to uncover NPLs not previously recorded and to measure them in a consistent way across the SSM, using a harmonised definition introduced by the European Banking Authority (EBA) and implemented by us in the SSM. The results of that work are on our website.
Going forward, NPLs are one of our key priorities for next year. The ECB is keen to tighten and harmonise supervisory policies relating to the management and workout of NPLs. Shortcomings related to recognition of NPLs, valuation of collateral and provisioning are being addressed. Supervisory reporting is being further developed and harmonised drawing on good practices of euro area countries.
The SSM has established an ad-hoc working group, with the national supervisors, to help identify problems and solutions relevant in each country and for individual banks. The ECB is not only aiming for harmonised supervisory policies, but also for individual and tailored action plans that can effectively be monitored.
Do you think the Banking Union can exist without a common guarantee scheme? Germany has misgivings on this.
The banking union needs a single deposit guarantee scheme; I don’t think anybody disagrees with that. What is being discussed is the timing and sequencing of how to put it in place. The Commission thinks that we should start now building the scheme, in a gradual approach that would involve several steps and a few years, while, in the meantime, the banking sector is strengthened also thanks of the work of the SSM. We at the ECB agree with this approach. Others, Germany in particular, think that we should first aim at a stronger banking sector, to avoid undue transfers of resources across countries via the deposit insurance mechanism. Those that support this latter viewpoint emphasise, in particular, the large and undiversified amount of sovereign bonds in in the portfolios of banks. They also note that sovereigns enjoy a special supervisory treatment, being exempt from risk weights and large exposure limits.
Do think banks, including Italian banks, should scale down their holdings of same-country sovereign bonds? Is so, how to achieve this target?
Yes, I think it would be good that we move, over time, towards mode diversified holdings of sovereign bonds by banks. The important point is to do it with the necessary gradualism. First of all, there is an international debate going on, in the Basel Committee and in Europe: we need to take fully on board the results of that debate. Second, it should not be forgotten that sovereign bonds play a central role in the functioning of financial markets in all countries, as collateral for many important transactions. Negative repercussions or instability in sovereign markets should be avoided. So, while the strategic goal to bring the supervisory treatment of sovereign bonds closer to that of other exposures is clear, and should be pursued, the timing and the process to do so will need to be decided with particular care.