Interview with La Stampa

Interview with Ignazio Angeloni, Member of the Supervisory Board of the ECB,
conducted by Alessandro Barbera and published on 27 December 2016

Mr Angeloni, to avoid Monte dei Paschi going bankrupt, the government has chosen the route of a public sector rescue, which was ruled out last summer. However, the first negative stress test results for the Siena-based bank date back to 2014. Has this come too late?

Public intervention is always the last resort for a bank, and is subject to strict rules. Senior managers at Monte dei Paschi di Siena (MPS) have been working in recent months on various solutions; the supervisory authorities have followed these closely and allowed a certain period of time in the hope that they would be successful. When that time came to an end, the government decided that it was necessary to intervene.

This is the third public intervention in the space of a few years. Why should it be the last?

It could be, if decisive solutions are implemented, especially with regard to the aim of ridding the balance sheet of its build-up of non-performing loans. It should also be taken into account that MPS is now supervised entirely by the ECB. We will continue to do everything we can to ensure that the bank finds a sustainable business model.

MPS is starting over again now. Before establishing how much the state’s input will amount to, will a new business plan be needed? How long will it take for it to be submitted?

I will just limit myself to saying that European supervision will continue to be actively engaged on the question of MPS, just as we have been actively engaged in the last two years.

The €20 billion in funds approved by the government will now be used to rescue other Italian banks in difficulty. Will this be enough to make the system safe once and for all?

The size of the intervention takes account of the nature of the problem and is based on the assumption that in some other cases a capital increase could be carried out on the market. The ongoing problems in the Italian banking system do not affect all banks, but only a limited number of them. They can be resolved, and solutions are at hand.

Some say that much more is needed – up to €50 billion.

Not everything that is necessary to recapitalise the banks has to come from the state. Even in the case of MPS a contribution could be made by long-standing shareholders and by subordinated bondholders.

The new directive on banks means that MPS will have to apply the principle of burden sharing. Back in 2013 Mario Draghi expressed concerns about the systemic risks that could be triggered by banks of the size of MPS. What’s your position on that?

Burden sharing was introduced by the Commission back in 2013. In his letter President Draghi stated that in the case of solvent banks which comply with prudential requirements but need to increase their capital as a precautionary measure, burden sharing might not be appropriate in certain cases. The Commission also specified that there are some exceptions to the principle: indeed, these include the existence of systemic risks. The Commission has also shown openness regarding the possibility of reimbursing individual investors who were misled in their choice of investment.

In the specific case of MPS, the government has decided to buy back the shares resulting from the compulsory conversion of just some junior bonds, the ones issued for the Antonveneta purchase in 2008. Do you feel that solution is satisfactory? Isn’t there a risk of treating this case differently from other, similar cases?

This matter does not fall within our supervisory mandate and therefore I would rather not comment on it.

Ultimately, the consequences of the conversion of the junior bonds seem entirely manageable. Some people are saying that this new mechanism is better for taxpayers than opaque rescue operations . Are they right?

The principle of risk-sharing responds to two important needs: ensuring that the cost of rescues does not fall to an excessive and undue extent on taxpayers, and reducing "moral hazard", that is, the incentive for managers to take on excessive risks in the knowledge that the state will always step in the event of a failure. This principle should be respected but also needs to be regulated and managed in such a way as to avoid risks to the system and unfair burdens on certain categories of investors. I'm referring, in particular, to retail investors who are not sufficiently aware – because they don't have enough information or technical know-how – of the risks they are running with their investment. It is vitally important for risky instruments like junior bonds to be bought only by informed investors who are able to bear any losses.

Isn't it a contradiction that decisions regarding possible systemic risks are referred to an institution – the Competition Directorate-General of the EU Commission – which does not normally deal with these issues?

The Community guidelines are complex, but the role of the ECB is by no means insignificant. In the event of a precautionary recapitalisation, for example, we have to certify that the bank is solvent and has enough liquidity. We also have to ascertain the maximum amount of public capital that can be allocated in the context of an adverse stress test scenario. Over time, we have established a good dialogue with the Commission on factors falling within our remit.

What should be done about the four banks undergoing resolution – Banca Etruria, Cassa Marche, Carichieti and Cariferrara – if they are not sold by the deadline of 31 December? There's been talk for some time now that UBI might be interested, but that interest still hasn't taken concrete form.

The conditions and constraints regarding the management of the four banks were agreed on by the government and the Commission. There are good grounds to hope that an agreement to buy these banks can be reached soon, in due course.

Today the government officially has €20 billion of additional debt. It's unlikely that the Commission will forget about that when it returns to the question of Italy's accounts. The possibility of seeking support from Europe and from the European Stability Mechanism (ESM) is also on the table. Is that feasible?

It's one of the possibilities envisaged by the European rules and has different technical and political implications from the course of action the government has opted to follow so far. Spain took that approach in 2012, with good results: it provided for the simultaneous rescue of several banks and sufficient margins in the amount of aid allocated. From our perspective, the higher the degree of stability provided by the route taken, the better.

With hindsight, wouldn't it have been better to accept European aid in 2012, along with Spain? Perhaps with banks having been cleaned of non-performing loans our growth rate would have been different?

Hindsight doesn't get us very far. We need to look ahead, and tackle the problems as they are today. In 2012, Italy was in a different situation. Suffice it to say that at that time the ECB didn't have supervisory powers over European banks.

To solve the problem of non-performing loans, wouldn't it be useful to set up a public "bad bank", as Spain did in 2012?

A public bad bank is still one of the possible solutions for difficult situations. It could be implemented for just one bank, or for several – as in the case of the four you mentioned earlier – or to manage the problems of the entire system, as in Spain.

How would you reply to people who say that European supervision has been particularly hard on banks like MPS?

Recently I've been hearing the opposite criticism, if anything: that we haven't been decisive enough since our initial assessment in 2014. The banks we identified then as being weak are the same ones that are now experiencing the most serious problems, which proves that our analysis was correct.

So the answer is "definitely not".

A basic assumption underlying our work is to ensure equal treatment for all supervised banks. That's an aspect that observers often don't pick up on. Naturally, they focus on specific national cases.

Your objection to the request for an extension of 20 days on the deadline for the capital increase of MPS was leaked to the press before it was communicated through official channels. Some believe that it has had an impact on the operation. Meanwhile you have decided to open an internal investigation to trace those responsible. Where does it stand?

With severe disappointment to all of us, a news agency reported the news of the decision of the Supervisory Board shortly after the end of the meeting of the Board. It was not finalised yet, as it was still awaiting the non-objection of the Governing Council. The internal investigation is ongoing, and we hope it will bring useful insights on the origin of that leak. But it is hard to believe that the outcome of the operation has been determined by this episode, however regrettable.

The ECB's monetary policy will remain expansionary for all of 2017. How would you reply to bankers who complain that their margins are being squeezed tighter and tighter? From your point of view, could that become a problem?

Banks' income has been reduced and some banks are suffering, that's true. But some banks are coping well with low rates, with low costs. Banks need to go on working to keep their costs low and step up their efficiency. Increasing long-term rates at the global level could, in the future, help mitigate the problem.