Interview with La Repubblica
Interview of Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Tonia Mastrobuoni and published on 30 January 2017
The Basel Committee recently delayed its decision on Basel IV – is this good or bad news for the European banks?
It is difficult to say. What is important is that we finish what we started. And we have to finish it quickly. The banks are thinking about the sustainability of their business models so they need to know their regulatory environment.
Don’t you think it’s becoming asphyxiating?
Regulation has become tougher, but let’s not forget where we have come from: a situation where banking regulation was not sufficient and supervision probably not tough enough. One of the lessons we have taken from the crisis is that we need to ask for more and better quality capital and better management of liquidity risk. We also have resolution tools to address situations where banks are in difficulty. So we are better equipped than before for possible crises. Of course, there are limits to the toughness of regulation and I think we are reaching these limits. The Basel Committee, which was given its mandate by the Committee of Governors and Heads of Supervision, is working to increase consistency in terms of capital requirements, in other words, to address outliers, but not to significantly increase the average level of capital. This is what they are trying to finish right now.
Is there a risk of US supremacy in European investment banking, especially with the difficulties Deutsche Bank is having?
In Europe, corporates get about 70-80% of their funding from banks and the rest comes from the markets. In the United States, it is the other way around. So we don’t necessarily need the same kind of investment banks. We need well-diversified, sound banks that can be global players.
…so it is ok for European banks to be weak in investment banking?
There are a number of European banks that are fully able to provide these services. But they are more diversified – they also do commercial and retail banking. I think that’s a strength, in fact.
The “hard Brexit” announced by Theresa May is already making some banks flee to Europe. What challenges will this bring for European banking supervision?
Well, we still don’t know how Brexit will unfold: there is still some uncertainty. The negotiation process will be long and complicated. Indeed, there may be more banks in the euro area than before and we will have to make more decisions on the licensing of bank activities and on internal credit assessment models used by these banks. This may imply a need for more resources, including for national supervisors, but we will address the situation when the time comes. I am confident we will be able to handle it.
Don't you think the market is already saturated with banks? And in the future we might have even more?
Indeed, in the aggregate, we do not have a shortage of banking services. We have enough. But this would not necessarily mean additional services, as some of them are currently already provided from London. So, it may be more of a shift to Frankfurt, Paris or Milan, for example. But I don’t think there is a risk of a huge increase.
Let’s look at another country. The Italian finance minister, Pier Carlo Padoan, and others have accused banking supervision of a “lack of transparency” regarding Monte dei Paschi di Siena (MPS) in particular, but also in other cases. How do you respond to that?
Information regarding individual institutions is necessarily constrained: in fact, we have an obligation of confidentiality. Also, information on individual banks is owned by the banks and they need to trust us that we will keep this information confidential. What I can say about this specific case is that all the people that needed to know about the developments concerning the bank had all the information. In fact, the case was discussed a lot within the Supervisory Board and the Banca d’Italia is represented on the Board.
Did the Italian members vote against the Supervisory Board’s proposal of a precautionary capital requirement of €8.8 billion? Do you think they leaked it?
Votes taken by the Supervisory Board are confidential. All members are aware of that. With regard to the leaks, there is an ongoing internal ECB investigation.
But there was strong criticism that communication was not adequate. Only later did the Bank of Italy provide more details. Don’t you think you should have provided more detailed information from the beginning?
As I mentioned, we have to be very cautious with information regarding individual banks. In many countries – like my own, France, for example – it is illegal to leak or publicise confidential information. The Banca d’Italia, which is, of course, part of European banking supervision, published explanatory material in this case. We agreed with this and it seemed to have been useful. But that is public information. As far as communication with all involved parties is concerned, the information was available to everyone who needed to know.
So you would have preferred to restrict information?
As I said, we are constrained by confidentiality about individual banks. The banks need to consent to the publication of confidential information. Just remember the comprehensive assessment in 2014, for example: we needed to get consent from each bank to publish the results. And there have also been a few instances where banks have proactively published details to inform the market and the public, and this is their prerogative. As for our role, we are always willing to actively explain our role as a supervisor, our mandate and procedures in particular cases.
And why didn’t you give more time for the recapitalisation?
Again, I prefer not to comment on the details, but, in essence, we did not believe postponing the deadline for another month would improve the situation at the bank, so we had to move to the next stage: a precautionary recapitalisation.
So your communication was impeccable.
I’m not saying our communication is perfect, but it does need to be constrained. We recognise we are a young institution, we started in the middle of a crisis and there is always room for improvement.
The biggest Italian bank, Intesa Sanpaolo, has expressed an interest in the third biggest insurance company in Europe, Generali. The bank’s CEO, Carlo Messina, suggested the proposed merger is partly a move to defend the “Italian-ness” of Generali. What do you think of the operation? Is it safe to have two such giants merge, given that, for example, they have many Italian government bonds on their balance sheets?
As you know, we don’t comment on individual banks.
So a more general comment: the ECB is the authority responsible for evaluating proposed ownership of the banks it supervises as well as their significant acquisitions.
We monitor developments very closely when they affect the banks we supervise and we keep in close contact with the other relevant authorities, where appropriate.
Do you think the Banca d’Italia made mistakes?
I wouldn’t comment on the past. We are working together very well to address the situation we face now. As regards non-performing loans, which is a problem in many countries, we recognise that there is much more to be done. And banks need some supervisory pressure to do what they need to do.
The problems for some banks date back a long way – as is the case for MPS, for example.
Well, we all come with history, but the greatest burden was caused by the recent recession. We had a crisis in France in the 1990s and learned a lot then. What is important is that we work efficiently now and improve the situation.
You have been a “tough supervisor in tough times”. Isn’t that dangerous if supervision works procyclically – and it has, in some cases?
That’s a fair point. We don’t want to be too procyclical. But unfortunately this is quite often the way it works. Before a crisis, there are “blue skies” wherever you look and it’s difficult to explain that we have to be tough. After a crisis, everybody – the banks themselves because their risk capital has deteriorated and the supervisors that have to make sure the system is sound – is obliged to take measures that have a certain procyclical dimension, that’s for sure. Also important in this regard are the various buffers or additional capital requirements that have emerged over recent years to encourage banks to make prudent credit decisions and to reduce, to some extent, the temptation for bankers to “over-lend” in the good times.
Shouldn’t you have a more macroprudential approach?
In Europe, there are many actors that contribute to macroprudential policies: national supervisors and central banks as well as European authorities, including the ECB and, in particular its Directorate General in charge of financial stability. We are simply one of the actors.
So you don’t think that supervisors should take greater responsibility for decisions they make, from a macroprudential perspective?
Yes, we have to take the big picture into account and, for instance, conduct impact studies on our decisions. We do that. And then for existing problems, such as non-performing loans, we have to be realistic, to realise that addressing them is a long journey and that it will take some time. But when you have a long journey to make, it is better to start early.
But why couldn’t European banking supervision be more flexible in the analysis of banks, taking into account the timing and the environment. Or are you blind to that?
We have to be strong and keep our nerve when it comes to capital requirements. Our role is to safeguard a solid and sound banking system, but we also look at banks individually, so timing is also a factor. However, our experience is also that if we are not ambitious, nothing happens. In Italy, in terms of tackling non-performing loans, not much progress was made during the first three years – the year of the comprehensive assessment and the two years of supervision that followed.
How are Italian banks doing now?
Like in many other countries, you have banks that are doing well; banks that are not doing so well, but that are working very hard to improve their situation; and banks that need supervisors’ “encouragement” to address their issues. For Italy, the big issue is legacy assets, specifically credit risk and non-performing loans. These need to be addressed. We have to make sure that banks aren’t putting all their energy into surviving and focusing only on these legacy assets instead of doing their job, which is to fund the Italian and European economy.
The government has established a €20 billion fund for banks. Is that enough? Will it work?
It will help for sure. It is a significant support which provides the possibility, together with the liquidity support on offer, to address a number of challenges. I think it is a good move. It shows recognition that there is a problem and it is good to start addressing it. Solving it will take time, but it’s not only the supervisors and the banks that have to be proactive.
What do you mean?
What we have seen in our work with non-performing loans is that, in order to address them, the judicial system has to have the capacity and the willingness to do so. A number of countries – among them Italy – have introduced laws to improve the judicial system for non-performing loans. I think these countries also need fast out-of-court solutions in order to find arrangements between borrowers and the banks. It’s a problem that goes beyond supervisors: external actors, like courts, have to be faster and more efficient.
Is it not the case that many Italian banks have made a lot of progress?
Very few have acted on non-performing loans. Some have done some good work, but others haven’t. So the truth is that we have to be ambitious and realistic. We don’t have to be so tough that we create problems for banks, but our approach is the same for all of the banks. You cannot be tough without being fair. We are realistic because we recognise that sometimes it takes time to address an issue.
Aren’t derivatives as dangerous an asset as non-performing loans?
We take them very seriously. Credit risk is as significant as market risk. Both need to be carefully monitored. We look carefully at the famous “level 3 assets”, the ones that have no available market price – but there is not much to be found for the time being, because banks’ market risk appetite has decreased significantly since the crisis, which is good. Level 3 assets were thoroughly investigated during the comprehensive assessment in 2014. We found a few things, but not that much. We stay vigilant and ready to act if the lessons from the crisis are forgotten.
Many are claiming, especially in northern Europe, that you and the ECB should be totally separated. How do you respond?
We come from 19 countries with 19 different cultures. In some countries, the supervisor and central bank are separate. In many others, they exist in the same organisation. At European level, the SSM Regulation enforces the separation principle, which is fully and properly implemented at the ECB. It is true that some countries advocated a strict separation; at the same time, there was a majority of countries that did not see any conflicts of interest. I believe the European legislator did a good job in addressing the concerns of the countries that preferred a separation, while still benefitting from synergies, such as support services available in central banks. I think it is the right balance.
You have been accused of taking a softer approach with German banks – for example, with the famous footnote in last summer’s stress test – and more generally, of not considering derivatives as sufficiently risky. At the same time as the MPS situation was unfolding, for example, the capital requests for Deutsche Bank were lowered. How would you respond?
We treat everybody in the same fashion. But for those that are going through a difficult period of time, it can, of course, be difficult to be obliged to improve the situation. When you are under pressure to do something difficult, you can have the feeling that it is being asked of you and not of the others, but that’s not true.
Nevertheless, some people say you have been easier on certain banks and that you are asking for less capital from them this year.
Pillar 2 requirements are bank-specific, which mean they relate to the capital we require of a bank for the risks that are specific to them. This is then added to the universal Pillar 1 requirement, which applies to all banks that we supervise, plus certain additional capital requirements that also apply to all banks.
It’s not the case that we are asking for less capital for certain weak banks in 2017. At the end of 2015, the legislation we had to follow when deciding on Pillar 2 requirements for 2016 was not clear. So we asked the European Commission for clarification and they asked us to split Pillar 2 into requirement and guidance. So, for an individual bank with a 2016 Pillar 2 requirement (P2R) of 11%, after this clarification, all other things being equal, it may have a P2R of 10% and a Pillar 2 guidance (P2G) of 1%. But, as only the P2Rs are published (because they are relevant for calculating the maximum distribution amount for dividends and coupons), it looked as if “the capital demand” (P2R +P2G) had been reduced, from 11% to 10% in my example. But this is not correct; we still expect banks to comply with the Pillar 2 guidance as well. So it may look like it is decreasing, but it’s not.
Going back to the agreement on the banking union in 2012, don’t you think it was a mistake to exclude smaller banks like the German savings banks?
No, I don’t think so. Establishing European banking supervision in such a short time was anyway a mammoth undertaking. And it would have been difficult to include more than just the systemic banks. There are many less significant banks in the euro area. This is the case in Germany, but not only there. German less significant banks make up 50% of the euro area’s less significant institutions; and if you add Italy and Austria, the three countries make up 75%. It makes sense for these smaller, less systemic institutions to be supervised by the national supervisors. I think the situation we have now works well like that.
And don’t you think it would have been better to introduce the Bank Recovery and Resolution Directive (BRRD) later, at a time when there were fewer fragile and indebted banks? And should it be changed now?
No, on the contrary, I think it is time for it to be implemented. Some countries were very much affected because of the heavy burden of rescuing their banks using taxpayers’ money. And this is something we have to try hard to avoid in the future. But obviously the new bail-in rules transfer the burden to the investors. So, it is crucial to make sure that all investors (and, in particular, the retail ones) fully understand the risk they take when investing in financial instruments.
Another important point is the timing of the BRRD. I think the comprehensive assessment was a good moment to repair banks that were found to have problems.
How can banks survive in an era of low interest rates?
Well, first of all, low interest rates have had a positive influence on banks for some time. They have created a better economic environment, as well as the conditions for stimulating more growth. Credit risk has decreased. Banks have seen how fixed income securities, bond yields and funding costs have moved in their favour. It’s the prolonged period of low interest rates that creates some problems. After a certain amount of time, this environment takes its toll and low interest rates lose their appeal. Then, banks’ profitability comes under pressure. And, of course, competition gets tougher when other actors, such as the fintechs, compete in the same space. But let’s not forget that banks could be more efficient. Cost-to-income ratios are pretty high – banks could do a lot to improve their cost structures.
Will there be an increase in lay-offs of bank staff in the next few years?
Not necessarily. For once, the changing demographics are helpful. A large generation of bankers that started working in the 1970s are naturally coming up to retirement age, so the transition might be smoother than it would have been otherwise. However, it is also the case that digitalisation is a challenge for some banks. But banks don’t have much choice about this – the younger generation take digitalisation for granted.
You are in favour of banks setting aside more capital to cover their exposures to sovereigns?
That has to be decided at international level so as to maintain a level playing field, but in my opinion it has to be done, yes. There are no risk-free assets; we learned this from the crisis. This is another thing that will take time and it is not yet clear exactly how it will be done. And, for the most part, sovereign risk is of reasonably good quality so the capital requirement will be low. But there should be some diversification, which I think is important.
Do you think the banking union will ever be completed with a European deposit guarantee scheme or will German opposition prevail?
Banking union consists of three pillars and we need the missing pillar. But this will take some time as well.
Why is banking – and especially central banking – still “a man’s job?” You have had a wonderful career and, no doubt, not an easy one. You are often the only woman in the room. What would you tell a young woman who wants to be a banker?
Or a journalist? I think a career is made up of chances and opportunities and everyone should be able to take them. Women should believe in themselves and work hard. Of course, we have the difficulty that many of us are still in a situation where we have two jobs: family and work. And in that case, maybe the important thing is to have a spouse or partner that supports you and the choices you make.