Interview with Politis

Interview with Danièle Nouy, Chair of the Supervisory Board of the European Central Bank (ECB), conducted by Yannis Seitanidis and published on 31 January 2016

1. The Single Supervisory Mechanism (SSM) has been in operation for over a year now. What was the main challenge and what were the achievements of the first year?

We are the biggest supervisory authority in the world and we were tasked with becoming operational and ready to do our job within an extremely short time frame. When I moved into my office in January 2014 there were only a handful of employees. Today, more than 1,000 people work for ECB Banking Supervision. We currently directly supervise 129 banking groups (comprised of approximately 1,200 banks), which have over €21 trillion in assets. In itself, this is a huge and complex task. The main tool for effective supervision is the Joint Supervisory Teams (JSTs), comprised of staff from both the ECB and national supervisory authorities. The JSTs combine the benefits of distance in decision-making with the best local expertise. During the first year of European banking supervision, the main challenge that we faced was building up good coordination with national supervisors and developing common methodologies, as we had to fuse 19 different national practices. I am very satisfied with the progress that we have made in such a short period of time. We have managed to deal with the various organisational issues and establish good cooperation between the members of the JSTs, who come from different countries and cultures. We are learning from each other and constantly improving our practices. Let me take this opportunity to thank my colleagues at the Central Bank of Cyprus for their hard work and cooperation. The work of a supervisor is not easy, but we are all joined together by a common goal to make European banking supervision the best it can be. This necessarily involves ongoing challenge and reflection within the supervisory family – which I very much welcome – so that we can improve as we go along.

2. The SSM is a mechanism which has federal characteristics in a union of independent states. In this environment, how difficult is it to harmonise regulation and supervision? For example, is a Cypriot bank subject to the same supervisory practices as a German or French bank?

That is indeed the main challenge. We need to ensure fully harmonised prudential banking supervision. The first step was of course the single rulebook, but as you know, the transposition of the Capital Requirements Directive into national law has led to parts of it being interpreted in different ways, creating an uneven playing field across the euro area. We also identified some 167 options and national discretions (ranging from intra-group exposure limits to equity holdings of insurance companies) and we have fixed 122 of them. We will not stop there. Our aim is to establish a unified, integrated and harmonised supervisory framework, and this requires harmonised regulation. It will help the market to broaden and, as a result, businesses and households will have greater access to a wider range of safer financial products.

3. I have noticed a paradox, which applies not just to Cypriot banks, but to all euro area banks. The ECB has implemented a programme of quantitative easing in order to support the real economy, but at the same time ECB Banking Supervision forces banks to hold more capital. Do you also see this paradox?

I cannot comment on monetary policy, but I don’t think there is any paradox here. Only well capitalised banks are able to provide loans to the real economy throughout the credit cycle. Poorly capitalised banks are active when bubbles – to whose development they contribute – are being formed, and they stop lending when economic and financial conditions deteriorate. Moreover, the banks supervised by us have capital buffers that exceed the minimum requirements, so our Supervisory Review and Evaluation Process (SREP) decisions do not affect their lending capacity. Furthermore, a higher capital ratio helps reduce a bank’s funding costs, which ultimately supports lending to the real economy.

4. The first round of the SREP caused a lot of complaints from systemically important Cypriot banks. Their (unofficial) comment is that ECB Banking Supervision is more severe than necessary. The other side of the story is that the level of provisions was lower than needed. Which is the truth?

Let’s face it: if there are no complaints then you are probably not a good supervisor. We are as tough as is warranted by the situation and the data that we find. We are also fully committed to delivering consistency and a level playing field across the banks we supervise. Supervisors can only be tough if they are always fair: we treat all the banks the same. In the SREP, on top of banks’ capital and liquidity we also assess other aspects relating to governance (risk management and risk appetite), business model, strategy and processes. Our job is to ensure that banks are well equipped and have sufficient high-quality capital to withstand the risks that they might encounter.

5. The main challenge for the Cypriot banking system is the management of non-performing loans (NPLs). New legislation (foreclosure framework, selling of loans) has been implemented, but levels of NPLs remain high. Are more aggressive scenarios, such as the establishment of an asset management company, on the table?

Your readers will know that a high NPL ratio hinders banks’ capacity to lend to the real economy. As well as identifying profitable lending opportunities, banks need to allocate significant time and resources to dealing with NPLs. Now regarding the establishment of a new asset management company, this is not something for the supervisors to decide.

6. Over the last eight months some notable progress has been made on the Cyprus issue. Once an agreement has been reached, one issue would be the adoption of the euro and the adjustment of the banking sector in the occupied areas, which Finance Minister Harris Georgiades has described as a “Wild West” situation. What are your views on this?

Like all European citizens, I welcome any progress that can be made on this political issue. Obviously, ECB Banking Supervision is ready to help and provide technical expertise in its field of competence, when needed, in order to make the transition as smooth as possible.

7. Three years ago the Cypriot banking system faced disaster. Many things have changed since then. Has this led to a stronger Cypriot banking system? Are Cypriot banks more resilient today?

Yes, definitely. Today, Cypriot banks are in a better state and they are gradually working their way through the problems of the past. Since 2013 their funding situation has improved and in the significant institutions that we supervise loan restructuring has recently accelerated. One can reasonably expect that this will eventually lead to a decline in NPLs, but further efforts are still needed. In a nutshell, a great deal of progress has been made and these efforts are bearing fruit, but there is still work to be done in order for the Cypriot banks to play their full role in supporting growth and job creation in the Cypriot economy.