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Interview with La Repubblica

Interview with Ignazio Angeloni, Member of the Supervisory Board of the European Central Bank, published on 4 May 2016 and conducted by Ferdinando Giugliano

Do you too believe that the Italian banking system is sound?

I repeat what I have said on various occasions, that the Italian banking system is more sound than it was in the past. Many banks have undergone our Comprehensive Assessment. Some then recapitalised. Supervisory analysis within the standard supervisory review and evaluation process (SREP) has been expanded. There are critical issues, concerning only a few banks, that are of sufficient importance to complicate the general situation. Fears of systemic dangers have been expressed, and the supervisory authorities are working to further strengthen the system.

Do you believe that the Atlante operation, which involves many banks contributing to the same fund, could increase systemic risk in Italy?

There is no doubt that the Atlante Fund is a step in the right direction. The fact that it has been created is positive, and it has had a positive effect on the market. As with all announcements and new things, investors are waiting to see how it will be implemented. The size of the fund is limited, not with respect to the first operation proposed, but with respect to the overall size of the non-performing loans (NPLs) problem. The challenge is to enable Atlante to make a positive contribution to reducing risks, and it can do this.

The question is not whether Atlante increases systemic risk, but how much it will reduce it, and what needs to be done to ensure that it reduces it significantly. If the fund performs well, and if Banca Popolare di Vicenza, of which Atlante is now virtually the sole shareholder, responds positively to this stimulus, it could trigger a virtuous cycle. It is hoped that other investors will come in and that the fund will grow, and I believe that the managers of the fund are working towards this goal. It is important that there is fresh capital and that there are international investors, because that too is a signal.

Alessandro Penati has said that the ECB will assess the information provided by the Atlante Fund’s investors’ committee. Is this true?

We do not supervise the fund or the company that manages it. The Bank of Italy supervises the company, we supervise the banks. Of course, it is important to us that the actions of this fund are fully geared towards strengthening the bank that it has acquired, and those it will acquire in future, with due consideration for prudential requirements. I would like to highlight two points. First, Atlante will have to deal with issues relating to internal governance, the appointment of the new Board of Directors, and the evaluation of the management. All these decisions must give a signal that there is a clear break with the bank’s historic management, which led to its current problems.

Second, there is an investors’ committee, whose decisions are not binding. This is an important aspect because some of these investors are banks, potentially in competition with the banks in which Atlante will be investing. It is important that the fund’s management acts independently. We supervise banks and will do all we can to ensure this operation is a success. Within the limits of our mandate we will do everything we can to support the actions taken by the Atlante Fund.

How much will the Atlante Fund pay to acquire non-performing loans?

The operation must, of course, be undertaken under market conditions; this is also important for investor confidence. In the case of non-performing loans, there is a range between the price offered by buyers and the price sought by the banks. This range must be narrowed, including through legislative measures that will facilitate debt collection and the liquidation of collateral. The government adopted a measure last week, and we will look at it to assess to what extent it will facilitate this process.

Can you say whether this measure will be able to reduce average collection times from seven years to eight months, as the government claims?

The press release from the Prime Minister’s Office seemed to indicate that certain measures mainly applied to new loans. We are assessing the complete text, which has just been published, to see what effect it could have on existing loans. This is what investors and the fund itself are counting on.

It seems that the Atlante Fund has been unable to encourage investors to buy shares in Banca Popolare di Vicenza. In fact, the opposite. Are you not concerned by this?

The Atlante initiative was launched a few days ago, it is new, and the markets’ response has not been negative. Before committing themselves, investors want to see more details, and this will be part of the work that the fund will undertake in the next few months. I don’t see signs of a lack of confidence in this initiative at present.

You have asked for many capital increases for Italian banks. Were there any deficiencies in the Bank of Italy’s supervision before the creation of the Single Supervisory Mechanism (SSM)?

The historic aspects of these problems are not within our remit, nor are they something we focus on. We are moving forward and looking at the situation as it is now. Our work with the Bank of Italy is ongoing; we work closely together and share the same aims. The Bank of Italy is part of the supervisory groups and is represented on the Supervisory Board. We are in harmony as regards our objectives.

The challenge for ECB supervision, especially during these early stages, lies in combining the in-depth knowledge of individual banks, which still lies with the national authorities, with the ECB’s clear mandate, independence and capacity for initiative. If these two things are combined, there is considerable potential for unified supervision, and I’m not just talking about Italy. We are working in several countries, both in central and northern Europe and in the Mediterranean region.

A criticism made in Italy is that you hound Italian banks, focusing excessively on NPLs while neglecting other problems, such as derivatives in German banks. How do you respond to these criticisms?

I’ve heard this criticism, but I don’t agree with it. Of course, any criticism is positive and thought-provoking. Our supervisory model is not unbalanced, either for or against any particular business model. What we look at are the risks. The risks in the system are credit and market risks. At present, credit risks are particularly significant, but we have definitely not forgotten market risks. For example, we are currently analysing internal models to see whether they are technically sound and take due account of risk.

There is a body of regulation that we have to take into consideration. One of these regulations relates to leverage. This requirement comes into force in 2018. We cannot impose a restriction on leverage: we can monitor it, publicise it, and make sure that all banks calculate it correctly. Market risks also benefit from this. The problem of NPLs in Italy and elsewhere should not be downplayed – the numbers speak for themselves – so our actions cannot be called hounding. That is an incorrect perception.

In an interview with La Repubblica, Competition Commissioner Margrethe Vestager said there are no exceptions to the bail-in for reasons of financial stability. Do you agree with this interpretation?

Interpreting the legislation is first and foremost the responsibility of the Commission, so I would not like to comment on what the Commissioner said. There have been two regulatory phases on state aid. The first was the communication in 2013, the second is the entry into force of the BRRD bail-in provisions this year. The first, which is still in force and which applies if the bank is not in resolution, states that in the case of risks to financial stability or disproportionate effects, exceptions to the bail-in of subordinated debt are permitted.

The BRRD also contains a couple of provisions in this regard. One concerns exceptions to the bail-in of certain instruments, again in the case of a risk of contagion or disproportionate effects. Another envisages that the resolution process should not be triggered, including in the case of state aid, if there are serious economic and financial disturbances, provided the aid takes certain forms. In any event, this measure is not an exemption either: banks must be prepared for the fact, a priori, that they must have 8% of liabilities to which the bail-in can be applied. In the event of a crisis, it is up to the Commission and the Single Resolution Board, in consultation with the ECB supervisors, to apply these regulations.

Are the automatic repayments made by the Italian government compatible with the bail-in?

These repayments concern investors who made investments on the basis of incomplete information. This is a separate case that has nothing to do with the general bail-in framework. It is a specific case in which, based on certain assessments, a number of investors were deemed to have made investments without having the necessary and correct information. A decision was taken to step in, using this specific measure. I would not link this measure with the bail-in provisions, otherwise it would seem that this occurs in every case. This leads me to the point that information and transparency are fundamental. These provisions on the bail-in have been approved by all states and were written some time ago; it is important that there is full disclosure and transparency. These aspects are the responsibility of the national authorities and the banks. For the main banks, which are directly supervised by the ECB, the European authorities and the Commission are responsible for regulatory aspects and their application.

The Bank of Italy believes that the bail-in increases financial instability, and the governor has requested a review of the regulations at the earliest opportunity. Do you agree with this interpretation?

Reviews are envisaged by the legislation; they look at how it has been applied in specific cases and, where necessary, whether adjustments can be made. This is normal practice. It would be in the nature of things if, when the time came to carry out this review, there were clarifications or adjustments. The BRRD must be looked at as a whole. It provides for two very important things, which are designed to reduce systemic risk. The first is that the resolution authorities must have resolution plans for every bank. This is a step in the direction of reducing risks, because it reduces the notion of “too big to fail”. Second, banks must have enough resources for resolution. Once these things have been done, the system is more stable. There is no doubt that the transition needs to be managed sensibly because we are starting from a situation where there are banking risks.

Do you think that having a lot of government bonds on the balance sheet increases the risks for the banking sector?

There is no doubt that government bonds are risky: the risk varies according to the characteristics of the individual countries, but bonds are not without risk. Managing them as if they were risk-free creates incentives to channel funds improperly and, in the long term, to hurt income and employment if the private sector is not adequately funded. Rebalancing incentives in the proper manner is an irrefutable principle. It must be done, but done cautiously, gradually and taking a number of factors into account.

First, in some countries government bonds play a fundamental role in how the financial system functions. This must be protected. Second, the process must be gradual, to avoid repercussions. It requires a transition, and in cases like this rigid restrictions must be avoided. We need to work with measures that are gradual and flexible, for example via weightings, for exposures or concentrations, that come into effect gradually. Clearly, a reform of this type must also take account of the context outside Europe. The Basel Committee has been working on this issue since last year. Views on this are very diverse. What Europe does must, as always, be part of a process of reflection that has international significance.

Do you believe it is impossible to have a common deposit guarantee scheme until agreement is reached on this issue?

No, definitely not. That is the third pillar of banking union, so it must be accomplished, according to a plan. The Commission has indeed published a plan, which is an excellent starting point. It is gradual, but it clearly sets out the end point. This gradualness also means that the risks can be reduced at the same time as the mutualisation of guarantees increases. What I can state with clarity is that ECB supervision is making a crucial contribution to reducing risks. The idea that ECB supervision would gradually reduce risks, leaving space for greater mutualisation, was already in place when banking union was created. The reduction of risks and the creation of guarantees must proceed hand in hand.

Are there any banks which Italians should be worried about at the moment?

We are working with all banks to improve them because there are individual situations, interconnections and systemic situations. That said, there are differences between the banks.

Are you worried about Monte dei Paschi di Siena (MPS)?

Monte dei Paschi is a specific case because it is very large compared with the banks in which the Atlante fund is starting to intervene. It has a high volume of impaired loans. It is still searching for a partner. Given the size of the fund and the size of MPS, a combination of securitisation plus Atlante, when the dust has settled, is clearly not an option. An intervention of this type in MPS would require resources of different orders of magnitude. It’s a case that needs work.

Do you think that because interest rates are so low, they could endanger financial stability?

Having interest rates that are very low, and now even negative, is clearly a new situation, both for those managing monetary policy and those supervising the banks. They have much less experience of this. Clearly, banks are taking a hit because margins are decreasing. Conversely, however, they benefit if this policy boosts the real economy or if they make capital gains on long-term securities. We need to see how the two aspects balance out, which partly depends on the business model. And then there is the issue causing concern to some people: the search for risk, which would increase systemic risks. This would militate against keeping interest rates at very low levels for long periods. There is no doubt that the banks must adapt their business models to a situation where interest rates are low for a very prolonged period. We are also looking at risk appetite within banks to check that these dangers do not emerge.

Do you see such low interest rates causing any particular risks to the financial stability of German banks?

In the immediate future, absolutely not. But we have to prevent low rates from prompting banks to take undue risks, and we have to ensure that lower profitability does not increase risks. Banks have been defending their margins pretty well, however, with regard to the reduction in interest rates. Recently, banks’ profitability has been harder hit by provisions for impaired loans than by margins.

Lastly, the ECB sent a letter this week to Veneto Banca, stressing the independence and professionalism criteria for appointing board members. Is this the “new order” for choosing directors?

We are convinced that being more rigorous about the requirements of independence and professionalism for directors is a necessary and fundamental step for many banks undergoing consolidation, especially those with high levels of non-performing loans. The more sophisticated codes of ethics, which are tending to become the norm everywhere, require banks to prevent any risk of a conflict of interest, or even the perception of such a risk. Legislation these days is giving supervisory authorities more effective tools than in the past. ECB banking supervision has put a lot of work into these issues in recent months, and has developed criteria and methodologies that will be used in the near future. We are setting great store by their efficacy.

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