Interview with Slovenian Press Agency
Interview with Danièle Nouy, Chair of the Supervisory Board of the European Central Bank (ECB),
conducted by Jernej Šmajdek and published on 24 January 2016
What are your views on the functioning of the Single Supervisory Mechanism (SSM) two years into your term. What are the main challenges you are facing? How is the coordination with national supervisors within the Joint Supervisory Teams (JST) functioning?
In 2014 we more or less did two things. First, we built up the SSM’s capacity, we recruited almost 1,000 people, comprising 800 supervisors and 200 support staff. Then we performed the gargantuan task of carrying out a comprehensive assessment of banks, made up of an asset quality review and stress test.
We started our supervisory work in November 2014. The priorities then shifted to building up the capacities of the JSTs, which carry out the day-to-day banking supervision of the euro area’s 129 largest banks. Because the heads of these teams for individual banks are not from the country of that bank, the learning process is also important.
In the JSTs, we have a few people in Frankfurt working on a bank, up to nine for the biggest banks, while the rest of the supervisors come from the national authorities. This means that the head of the JST has to be an excellent manager, coordinating teams whose members come from different countries and cultures.
Another priority was to have policy notes for the different supervisory tasks based on the best supervisory practices across the member countries, all with the goal of having a specific SSM approach.
Last year everything was new, so we needed policy notes. Otherwise we might have been taking decisions that could have led to setting unintended precedents.
Very high on the agenda was setting up common procedures and methodologies for the Supervisory Review and Evaluation Process (SREP), the purpose of which is to check that banking institutions have adequate arrangements, strategies, processes and mechanisms as well as capital and liquidity to ensure sound management and coverage of their risks. Before that, we had 19 different ways of undertaking the SREP. I believe we have done a good job on that.
To achieve a level playing field and consistency in supervision, the harmonisation of regulations is needed, so we addressed the national options. In principle, we have harmonised regulation within Europe. But we found up to 167 different national options in the CRD IV package (Capital Requirements Regulation and Directive). We managed to fix 122 of them, which is an incredibly high number. Other national options are in the hands of national and EU legislators. We would very much like to have harmonised regulation to implement.
This year the challenge will be to establish good cooperation with the Single Resolution Board (SRB), which began operations on 1 January.
Besides setting up all these building blocks, we conducted the day-to-day supervision of banks and I think that this has already significantly improved banking supervision in the euro area.
Has the SSM lived up to what it was set up to achieve? A better and more effective supervision of euro area banks, more stability and more trust in the system?
I think we are trusted to be tough and fair supervisors and to make the system sounder and safer. This being said, we were created at the end of a crisis and we received banks in different stages of recovery.
But I am absolutely convinced that we have very significantly improved the situation. However, there is still work to be done. We did a lot but there is still much to do to improve the trust in the banking system. This where we are at the moment.
What is the current state of the banking system in Europe? Has it entirely healed after the financial crisis? Where do you see the main problem points?
Not all the banks were in bad shape after the crisis. There were thankfully some strong parts, otherwise our work would be even tougher.
But the overall situation has indeed significantly improved. We can see that in the quality of the banking assets and the non-performing exposures. The level of capital is much higher. More than €200 billion of additional capital had been raised by banks even before the Europe-wide comprehensive assessment in the autumn of 2014.
Profitability is still a challenge for euro area banks. For certain banks, the challenges come more from legacy assets, such as non-performing exposures and provisions that have to be made; for others they come from narrow interest rate margins due to the current low level of interest rates.
All this means that banks have to assess the sustainability of their business models and review them. All banks, big or small, public or private, mutual or non-mutual, have to do that.
I think we are on a good trajectory to continue to improve the situation which has already improved significantly.
Following up on this. What are the challenges European banks are facing and will be facing in the future? Lending activity is somewhat improving, but it is still seen as lagging behind pre-crisis levels. What are your views on how to boost lending while still keeping risks under control?
It also depends on the situation in the respective economies, not only on the banks. If there is no growth, if the economy is not doing well, the demand for loans will remain low.
I don't believe that the regulatory changes in recent years are preventing banks from issuing new loans. It is probably more due to the health of the economy. When the economy improves, I think you will see lending activity improve too.
The New Year has brought the full implementation of new bail-in rules. What will in your view be the repercussions of this? Could it undermine the trust of investors and savers in the banking system, as some argue?
Times are changing. Previously, investors faced the risk of losing money when they were investing in corporates, but not when they were investing in banks. They were not losing money because governments were supporting the losses and bailing out the banks. This should not happen anymore. In many countries, governments can simply not afford it. For me it is normal that when you invest in banks you may lose some money. Just as when you invest in corporate bonds or non-banking stocks.
What is important is that deposits of up to €100,000 are fully protected and that this is the case in all European countries. This is a significant amount of money for most people and the customers of the banks should be fully aware of this new regime and of the legal rights of different bank creditors.
It is a challenge for the authorities in charge of consumer protection to ensure that investors, particularly individuals and other small investors, are fully aware of the situation and use their judgement when they invest in banks. Just as they use their judgement when they invest in corporates.
What are your views on Slovenia's banking system two years after the comprehensive stabilisation measures? How is it faring compared to other EU countries? What are the major challenges for Slovenia's banks?
The solvency of the Slovenian banks has significantly improved. That is the strength of the Slovenian banking system. The funding capacity has improved as well in the last two years. Good work is being done also concerning non-performing exposures.
On the other hand, for some banks profitability is still one of the weaknesses, and for some banks the level of non-performing loans is also still high. Moreover the credit risk on corporates is still high since some companies are still too indebted and leveraged. This also partly explains the subdued lending activity.
There is some criticism in Slovenia as to the scope of the banking stabilisation measures and the amount of money that was spent on them. Some argue that the scenarios employed in the stress tests were too negative and that the criteria in the asset quality reviews were too strict. How do you respond to this?
I do not agree with that. The adverse scenarios in stress tests are not economic forecasts. Their purpose is to set up a sufficient capital buffer for potentially difficult times in the future.
When we had the Europe-wide comprehensive assessments of banks in 2014, the main Slovenian banks still showed capital shortfalls, but they were small, so the banks were able to cover them with their annual profits. This demonstrates that the stress tests conducted by the Bank of Slovenia were just right in 2013.
What are your views on the current state of global coordination of financial regulation? Critics say that the resolve, visible during the crisis, has waned considerably, and that the next crisis is around the corner. What are currently the main imbalances in the financial system? Is the European banking system resilient enough to cope with a new crisis?
We had two crises in the euro area – the worldwide crisis and the sovereign debt crisis. I think we are now in a recovery phase. However, this does not mean that issues do not exist here and there.
A possible source of difficulties for banks are real estate mortgages. We have 19 countries in the SSM and mortgage systems are very different across this group. That is why I asked my team for factsheets on the different kinds of mortgage systems, their strengths and weaknesses and the possible risks, in order to be prepared for possible negative developments in one or more countries.
We have so far not seen any adverse developments. Some macroprudential measures have been taken, in the form of limiting loan-to-value and loan-to-income ratios. This is probably helping.
We may have new crises at certain moments in the euro area, but we have never been better equipped to address them. We have new regulations, more capital in the system, and macroprudential measures.
And when problems do occur, we have the resolution tools provided by the Bank Recovery and Resolution Directive as well as the Single Resolution Mechanism (SRM). This means that if the SSM has to declare that a bank is failing or is likely to fail, then the SRB will decide on the measures necessary, maybe also using funds from the Single Resolution Fund. This is very important and something we did not have in the past.
Let me repeat: we cannot prevent future crises. Hopefully, thanks to good supervision by the SSM, they will however be smaller in scope, less damaging and addressed earlier. The distance in the decision-making process provided by the SSM and the tools at our disposal make us well equipped to deliver that.
Does this mean that the European banking system is resilient enough to cope with a potential new major crisis?
It is much better equipped and my goal is to make it even more resilient in the future. I have three more years in my mandate to do so and I will continue to deliver on this.