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Interview with Agora

Interview with Danièle Nouy, Chair of the Supervisory Board of the European Central Bank (ECB),
conducted by Omiros Emmanouilidis and published on 13 February 2016

1. Has ECB Banking Supervision succeeded in supervising the euro area banking sector?

Not only did we manage to launch European banking supervision and conduct a comprehensive assessment of the institutions that we would supervise within a very limited time frame, but since assuming supervision in November 2014, we have dealt with some considerable challenges on the road towards establishing a level playing field across the euro area banking sector. We have applied a common Supervisory Review and Evaluation Process, the SREP, which has resulted in additional capital requirements under the common methodology, thus improving bank capitalisation. And we have also largely addressed the issue of options and national discretions (ONDs) that are an impediment to consistent supervision: of the 167 such ONDs, we have managed to fix 122. The others are in the hands of legislators, not us. As supervisors we are pushing legislators to make sure that the number of ONDs is reduced even further.

2. What must be done to enhance further the role and effectiveness of ECB Banking Supervision?

Our goal is to continue improving the very good cooperation that we have between ECB Banking Supervision staff and the staff of the national supervisory authorities who work together in the Joint Supervisory Teams (JSTs). The JSTs are the cornerstone of our banking supervision. We have around 1,000 people working in Frankfurt am Main and around 2,000 others in the national authorities, such as the Bank of Greece. And let me say that I am very proud of the excellent cooperation we have had with our Greek colleagues. They have indeed performed a colossal task over the last two years. Apart from that, the key to the future effectiveness of ECB Banking Supervision will be the harmonisation of the supervisory framework and regulation.

3. What are your priorities now?

There are two difficulties facing banks: non-performing exposures (NPEs), which are quite high in a number of European countries, and the risk to profitability because of the low interest rates. Our top supervisory priority for 2016 is therefore to make sure that banks review their business models to ensure that they are fully sustainable.

4. How can a well supervised banking system contribute to growth? Aren’t the high capital requirements impeding growth?

High capital requirements do not impede growth. Only well capitalised banks are able to finance the economy throughout the business cycle. Poorly capitalised banks are exuberant during bubbles, during happy times, but refrain from lending to the economy when there is a crisis, so they aggravate the situation.

5. In 2015 the Greek banks were recapitalised in line with the findings of the comprehensive assessment conducted by the ECB. Will they be excluded from this year’s stress test exercise?

Yes, they will be excluded this time around because they already went through a stress test in 2015. And that test was in fact a comprehensive assessment that also comprised an asset quality review. So it was actually even more rigorous than a pure stress test.

6. But would you say that banks need to undergo another comprehensive assessment because of the current situation?

No, I wouldn’t say that. The comprehensive assessment we conducted in 2015 was rigorous and the assumptions of the adverse scenario were appropriately conservative and adequate for the current situation.

7. Will more funds be required for the implementation of the banks’ restructuring plans? Is a bail-in off the table for good?

The capital plans have been fulfilled so there is no need for additional capital requirements. We are in good shape in that respect and, thus, there is no reason to believe there is a need for a bail-in, as there is no need for a recapitalisation. However, the best guarantee against another recapitalisation is for growth to recover based on the implementation of the programme and for banks to tackle the NPE issue decisively.

8. What must be done to repair the loan portfolios of the Greek banks? Should the NPEs be dealt with on the banks’ balance sheets or be sold to funds?

Given the magnitude of the problem, all available tools should be considered. Part of NPEs can be expected to be dealt with on banks’ balance sheets. Others might be addressed by selling them. All possibilities should be examined as we have a wide variety of situations, such as loans to small and large companies, or loans to individuals. Different cases may require different approaches and this situation will take time to correct. So, as with every long journey, it is better to get started early!

9. Will ECB Banking Supervision play a role in the legal and regulatory framework regarding the management of loans?

The legal and judicial framework must indeed be adapted so that banks can do their job, which is to fund the economy, and help growth to resume. But we are not the legislators and there are aspects of the NPEs that go beyond banking supervision.

10. The evaluation of the boards of directors of the Greek banks is pending. What criteria will apply?

The assessment of the adequacy of board members and of the balance of board composition is carried out by supervisors through CRD IV and fit and proper rules, which are transposed into Greek legislation. Part of the Greek national legislation is the new Hellenic Financial Stability Fund law, which provides criteria for the assessment of board members.

11. How will the banks be able to get access to more liquidity in order to reduce their dependence on ELA? When will the waiver be reinstated?

I am not able to comment on the waiver as this is not in the remit of banking supervision. Regarding ELA, banks have already managed to slightly reduce their reliance on it. Nevertheless, it is still a large and costly source of funding for them, which can be reduced by attracting deposits and increasing banks’ access to market funding. In this regard, confidence must be restored. Implementation of the agreed reforms is therefore essential. For our part, we are committed to ensuring good supervision of the Greek banks in order to help rebuild confidence in them. This is what I can promise.

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