Interview with Bank|Wereld (the Dutch Banking Association magazine)
Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB, following her visit to the Dutch Banking Association on 31 May 2017
Where does European banking supervision stand now, in your opinion? How important is it for the Chair of the Supervisory Board to visit each participating Member State?
European banking supervision made a rapid and powerful start. Within a very short time, we set up a huge system that spans 19 countries, 26 national authorities plus the ECB, and comprises almost 6,000 supervisors. And the system immediately became operational.
Of course, European banking supervision is very much a joint effort. Although the ECB forms the hub of the system, it does not supervise all the banks alone. To a large degree, it relies on the national authorities. The ECB directly supervises the 125 largest banking groups. For each large banking group we have one Joint Supervisory Team that is headed by ECB staff and comprises supervisors from both the ECB and the national authorities. These teams are the cornerstones of European banking supervision. The remaining 3,200 smaller banks are directly supervised by the national authorities; here, the ECB only plays a supporting role. For instance, we develop joint standards to ensure that small banks across the euro area are also supervised to the same high quality standards as the large banks.
So it’s very important that I regularly visit all the national authorities and keep in close contact with them. In a way, it’s like riding a multi-seat tandem. By visiting each authority, I want to ensure that the pedals and wheels are working well and that every rider knows where we are heading.
You recently said in a speech that “the single rule book is not so single, and the level playing field is not so level”. What can the ECB do to establish a truly single rule book and what would you say to Member States that give priority to national legislation over European rules?
European legislation is indeed less harmonised than it should be, given that our goal is a banking union and a truly European banking market. To create a level playing field for banks we need the same rules in every country as well as a single supervisor. The single supervisor has now been established, but the rules for banks still differ to some degree.
For our part, we have helped to achieve a more level regulatory playing field by addressing the subject of options and national discretions, or ONDs. European legislation contains a number of ONDs that give supervisors and governments some leeway in how they apply the rules. This creates uneven patches on the playing field. That’s why we, together with the national supervisors, have agreed to exercise many of these ONDs in a harmonised way across the euro area. Still, some ONDs are not within the remit of supervisors but of governments, and these should be further harmonised.
My message to the policymakers is that fragmented regulation increases risks and makes European banking supervision more complex and costly for banks. If policymakers are serious about banking union and a truly European banking market, they should seek to further harmonise the rules.
According to the latest Basel 3.5 proposals, many internal models – especially for the lower- risk portfolios – will be completely overwritten by a non-risk-sensitive output floor. What do you think, in the event of such an agreement, Europe must do? Take its own steps to safeguard risk sensitivity? Can TRIM (targeted review of internal models) play a role in maintaining risk sensitivity?
Risk-sensitive approaches certainly have their place in determining capital requirements. And internal models are an important tool for banks to determine risk weights for the assets they hold. However, over time these models have become very complex. This makes them prone to error or even manipulation. There are several ways to restore trust in the output of internal models and in capital buffers. One way is the output floor you mentioned. And, by the way, the output floor will be based on a new, more risk-sensitive standard approach and will not completely overwrite internal model results.
Our targeted review of internal models, or TRIM, aims in the same direction. It seeks to enhance the soundness and credibility of internal models and confirm their adequacy and appropriateness. The output of internal models should be driven by actual risks and not by modelling choices. In pursuit of that goal we have just published a guide that sets out our supervisory practices and how we interpret EU law on internal models. This will ensure a consistent approach when dealing with internal models. We have also put in place a common method for TRIM on-site investigations; more than 100 such investigations will take place in 2017. They will assess internal models for credit risk, market risk and counterparty credit risk. We expect to finalise TRIM in 2019.
Although the economy in the euro area is experiencing an upswing, banks have to deal with a low-interest-rate environment which puts pressure on their margins. De Nederlandsche Bank has stated in its Overview of Financial Stability report that the ECB needs to evaluate this side effect of accommodative monetary policy against its effectiveness in terms of achieving price stability. Do you agree and have you discussed this with ECB President Draghi?
First of all, I am a banking supervisor not a monetary policymaker – I cannot comment on the ECB’s monetary policy. Speaking as a supervisor, I agree that the low interest rates are a big challenge for banks. So I urge the banks to reassess the sustainability of their business models and adapt them to the new environment. They should try to cut costs or tap new revenue sources. You can be assured that we are monitoring how banks are dealing with this challenge very closely.