Interview with Corriere della Sera

Interview with Ignazio Angeloni, member of the Supervisory Board of the European Central Bank,
conducted by Federico Fubini and published on 20 September 2016

Banks have criticised the ECB for creating uncertainty around capital requirements by adjusting them several times. Is it perhaps time for a break?

Yes. Let me explain. If over the last six to twelve months there has been some uncertainty regarding capital requirements, this is due to uncertainties of a regulatory nature regarding what European law on capital requirements recommends and requires. Last year, the ECB carried out an analysis to determine the capital requirements of each and every bank. This is known as the SREP. For the first time, we used a new method which resulted in a slight increase – around 0.30% or 0.40% – in capital requirements for 2016. The SREP looks at the riskiness of a bank as a whole and not only at the quality of assets on its balance sheet, as was the case the year before. Now that we have evaluated all the risks, we can consider that if the risks remain unchanged we have reached a plateau, a “cruising speed” if you will, with respect to the capital requirements for those risks. Mr Draghi and Ms Nouy have both said that we have reached an appropriate level.

Naturally, the situation of each individual bank will be assessed on a case-by-case basis, and their respective requirements could be changed; however, the overall level of capital requirements should not change significantly.

When is a bank considered to be so close to the minimum threshold of its capital requirements that it cannot pay out bonuses, dividends or coupons to its subordinated shareholders?

This is covered by an article of the European Capital Requirements Regulation. We have asked the Commission and the EBA for clarification on how that threshold should be applied. On the basis of their suggestions, as of this year we will also make a distinction between requirements in the strict sense and guidance. Only failure to satisfy the former will lead to a ban on the allocations you mentioned. The guidance, on the other hand, will not lead to automatic and immediate intervention, but rather progressively more incisive and targeted supervision. In general, barring specific and exceptional reasons, we expect the guidance to be adhered to.

Are these the rules which are behind the capital increase on the horizon for Unicredit?

They are the rules which apply to all banks, even though the requirements for that bank, or for any other, have not yet been announced. This will probably happen in January, when the SREP has been concluded. We are still working, and have almost finished making the first calculations. As I have already said, overall we can expect the results of the SREP to be more or less in line with last year’s, although there will be some fairly substantial changes linked to the risk situations of individual banks. These may be upward revisions for some, downward ones for others.

Does that mean that any bank capital operation will be based on the new indications, and not the old?

Of course. But as I have said, on the whole we can expect that, overall risk levels being equal, capital in the banking system is on average already at the desired level.

Mr Draghi has clearly stated that disposal of non-performing loans is a process that will take time. Ms Nouy, on the other hand, seems to take a different stance, applying more haste...

I wouldn’t say that. Ms Nouy has said the same things. The ECB has moreover launched a consultation with banks on this matter, because we want there to be awareness of the issue, internal information and planning. Banks must equip themselves with plans which are credible and ambitious, including deadlines for dealing with non-performing loans. These plans will be discussed with each bank and calibrated in the best possible way. In order to achieve this, banks must have all the key information at their disposal and must, if they have not done so already, set up internal structures to deal specifically with this problem.

Why have you at times been reluctant to say that the process will take time?

I don’t think we have been, and in any case to say that it will take time may give a misleading message, which could be interpreted to mean that there is no urgency. Not so: it is all the more urgent to begin now precisely because it is a long process, and we need to move as quickly as possible.

If, when the period of non-binding requests has passed, a bank is still in more or less the same situation as it is today, what then?

It comes under the standard supervisory process. This starts with a request for information and clarifications, with an increasing scale of intervention. At the end of any supervisory process, if necessary there is a request to find capital. However, I don’t expect this to happen in the majority of cases. Hopefully, not in any. On the contrary, I expect this consultation to encourage banks to do what is necessary to manage non-performing loans. That is what we want: not to push them out of the market or ask for capital where there is no need.

Banks – and not only in Germany – are complaining about low or negative interest rates. Do they not create credit distortions in the long term, keeping insolvent companies alive?

Very low rates are an unprecedented phenomenon; there is no in-depth knowledge on how they operate. We are in largely unexplored territory.

But the profitability of banks has declined, has it not?

Monetary policy impulses, including negative interest rates, are working. Interest rates on loans have fallen. But there can be side effects which are not insignificant: less profitable banks, banks which are struggling. Reduced margins penalise returns on traditional financial intermediation. In addition, in the past we have observed, in a range of international experiences, that an excessive and prolonged availability of liquidity and credit can lead to an increase in the level of risk in the system, which could result in crises. It should also be pointed out that this risk arises above all in situations where there is a boom in the real economy; this is not the case now. Very low and negative interest rates can also lead to distortions and inefficiencies in the use of resources. For all these reasons, even though at the moment there are no alternatives to the ECB’s policy, we all hope that it will be successful enough to enable interest rates to return as soon as possible to normal levels.

Does Basel IV not risk creating yet more regulatory uncertainty and another de facto credit crunch after nearly ten years of continuously evolving rules?

Basel IV does not exist: the term is an over-simplification used by the media. Simply, Basel III is being finalised. What the supervisory authorities are doing at the international level is attempting to complete the reform of Basel III with certain essential elements which were envisaged previously. I would point out, in particular, the revision of the rules on the use of internal models to measure risk and the use of the standardised approach for certain risk categories which are particularly difficult to model. The meeting of the governors and the supervisory authorities held in Basel recently confirmed that opinion. What we need to avoid is the completion of the reform leading to an excessive increase in capital requirements at a time like the present. This is an essential component: if we don’t do this, we will have left out a really important aspect. Nevertheless, we believe that we are on safe territory when it comes to capital requirements. We will be finished soon – by the end of the year – and then there will be a period of greater regulatory security which should enable the system to settle down. In Basel the governors have already said that a significant increase in capital requirements will be avoided.

After all, banks and the markets need clarity and certainty regarding the regulatory framework. And this is what we are trying to achieve.

The quality of the balance sheets of some very large European banks – DB and also the large French banks – has never been questioned by the ECB, even though they carry financial risk on illiquid positions. You have in this respect relied on the opinion of the banks themselves, which use internal models to produce values.

It is not true that we have not been intrusive in our investigations into all risks, including those. We analyse all risk factors, and market risk takes a central place in our analyses. We examine the internal models of all banks, including the ones you have mentioned, in a precise and prompt manner, looking at credit risk models as well as market and operational risk models. We have a specific project in place for assessing internal models. We have done a lot of work on large banks in central Europe, which I will not name. It is a fact, however, that our analyses show that credit risk in a significant portion of the European banking system warrants close attention. The attention we pay to credit risk is linked to our perception of the risks that are prevalent at any given moment. But we treat everyone equally.

What is your view on a capital increase like MPS’s, equal to eight times a bank’s stock exchange value? Under what conditions can it succeed?

We cannot comment on the situations of individual banks, and for that reason I can't answer your question. The dialogue between a bank and the supervisory authority is not something that can be made public. It is governed by rules which must be complied with.

There has been much talk of the gross value of non-performing loans standing at €360 billion.

The Italian authorities say that this figure is misleading, because account should be taken of guarantees and provisioning, and that therefore the actual exposure is a fraction of that €360 billion. Do you share that view?

Provisioning and guarantees are important, but they are not the whole story. Non-performing loans, even when partially or largely covered by provisioning and guarantees, mean more budgetary rigidity and less profitability. The problem should not be exaggerated, but neither should it be underestimated.

So gross values are also significant?

Yes, absolutely. And this is important right now, because we are undergoing a profound change in terms of banks’ profitability. The macro environment is not favourable for banks, and in addition to this technological transformations and changes are under way. If this were a period in which the profitability of banks were not an issue, perhaps we could overlook certain details. However, today we need to consider absolutely everything.

Does that mean that there is a systemic problem in Italy?

I don’t think that there is a problem for Italian banks in general, but rather one which pertains to some Italian banks. The results of the EBA stress tests reinforce that conclusion. Naturally, I am talking about the “significant” banks, which we supervise directly, because the less significant banks are supervised by the national supervisory authorities. For some time, some of those banks have been characterised by fragility. As they are significant in terms of their size and interconnectedness with the rest of the market, it is important to keep their links with the rest of the system in mind. This is a general rule which is valid at all times and for all countries, not only Italy.

Since the Bank Recovery and Resolution Directive came into force European banks have lost more value on the stock market than their UK or US counterparts. Could this be due to certain inflexibilities in the Directive (or in how it is interpreted?)

I cannot exclude the possibility that the perception that the Directive could influence some components of the banking system may have eroded market confidence to a certain degree, or led investors to behave more cautiously. However, bank stock prices went up significantly, also in relative terms, from the middle of 2012 to the beginning of this year. But leaving that aside, what is important now is to realise that the Directive constitutes a significant step forward in terms of building up solidity in the system. It makes the process of resolving Europe’s banks more systematic and transparent, regulating the distribution of the costs of banking crises and protecting taxpayers. The so-called “bail in”, shifting some of that burden onto the bank’s creditors, is a rule already applied in other jurisdictions, like the United States, for example. It is important, moreover – and I have said this on other occasions recently – that the Directive is applied comprehensively, both in the provisions which require the involvement, within certain limits, of a bank’s creditors in the event of a crisis, and in those which provide for that involvement to be suspended in specific cases, for example where there are systemic risks.

What do you make of Renzi’s remark that Italian banks will probably need to halve the number of their employees over the next decade?

Naturally, I will not comment on what the Prime Minister says. But I would like to point out that the problem of banks’ cost structures, which was particularly pressing in various European countries, including Italy, in the 1990s, has resurfaced today in connection with the restricted revenue margins I referred to earlier. I remember that when I was at the Banca d’Italia in the 1990s, the cost of staff at banks was a central issue. A lot has changed since then. The total cost to revenue ratio has fallen, and now stands at around 60%. Today the problem is once again a pressing one, and there are notable differences: some banks, particularly in northern Europe, are well under the 50% mark, whereas others are closer to 100%. One of the ways of reducing manpower costs is automation. It is not difficult to imagine that these phenomena could gather speed, and competition intensify. The bank of the future will probably be very different to the bank of today. Banks must prepare themselves, rethinking their business models in the light of this new environment.

They call it Banking Union, yet since it came into existence there have not been unions between banks. Why?

Mergers between large banks are complex operations; there can’t be many in a year. Today we are in an economic, financial or monetary situation that makes it difficult for banks to operate as they are. The perception that the reform process is not complete may also play a role. But as I have explained, this should only last a short time.

Bankers are saying that they are not carrying out mergers because they do not know how what capital requirements the ECB will impose.

Placing the responsibility on others is always a primary reflex, in anyone. But we have not said that operations of this kind should not be carried out, nor have we taken any step that would prevent them, when they can be safely carried out. The conditions should always be in place so that the structure that results from a merger is as solid as possible and that the new entity can coexist and compete in the category of larger banks to which it belongs.