Interview with Handelsblatt
Interview with Ignazio Angeloni, Member of the Supervisory Board of the ECB, conducted by Yasmin Osman on 27 October 2017 and published on 3 November 2017
Mr Angeloni, Goldman Sachs boss Lloyd Blankfein has been raving about Frankfurt. As someone who has lived in Frankfurt for 15 years, can you see why he likes the city so much?
Yes – Frankfurt is a fantastic city and a great place to live and work, especially for people like me with families. The city has changed a lot in recent years and is constantly evolving. Frankfurt may be relatively small, but it offers a great quality of life. In Rome, for example, where I come from, getting around the city is much more difficult. That does not mean, however, that the ECB prefers Frankfurt to other financial centres.
Blankfein was over here because Goldman Sachs is looking to shift jobs to Frankfurt on account of Brexit. Other banks are more hesitant about moving. Are they being too hesitant?
We have been talking to banks for some time now. Many drew up contingency plans months ago. But of course, they are also following the political negotiations and want to wait and see how things play out. I can understand that, as all of this entails costs. We are endeavouring to be as clear as possible with the banks about our supervisory approach and how we issue licences and approve internal risk models.
Are banks doing enough in this regard?
Banks were quick to start thinking about this, but their progress has slowed of late. They shouldn’t waste time. However, we are not talking to everybody. Many of those institutions – especially the giants of global finance – are not, under EU law, credit institutions that are subject to ECB supervision, but rather securities trading firms (i.e. investment banks), so the national supervisory authorities are responsible for them.
What are the chances of the ECB being tasked with supervising large investment banks as well?
The European Commission intends to propose that the ECB also be tasked with supervising large systemically important investment banks. Those institutions exhibit considerable synergies and bank‑like risks, so the EU wants to give the ECB responsibility for supervising them, and we welcome that.
One point of contention is supervision of the clearing of euro-denominated securities. Can that clearing continue to be carried out in London, or will it have to take place within the EU?
London’s clearing houses serve many clients in the euro area, so there is a lot of cross-border activity, which entails risks. We at the ECB do not have a specific policy on the location of clearing activities, but we need to be able to control how those clearing houses are supervised. Clearing is an important service, and it’s important that it is provided in a manner that is sufficiently safe.
And if it is, clearing can continue to take place in London?
Yes – if we are able to be involved in the flow of information and the supervisory activities. However, that decision has not yet been made. It may be that these activities can continue to be carried out in London. But it could also be that certain activities need to be moved elsewhere.
The ECB has begun the process of exiting its ultra-loose monetary policy. Does that have more advantages or disadvantages for Europe’s banks?
There are lots of different effects at play, and they work together. On the one hand, the low interest rates have reduced many banks’ margins. On the other hand, that has increased the market values of longer-term securities in particular. Moreover, monetary policy has given the economy room to breathe, which has allowed economic activity to recover, and that has had a positive impact on firms’ credit quality. So, there is no easy answer to your question. However, all things considered, it is good for the banks to have greater room for manoeuvre in terms of their interest rate margins. Of course, it’s important that the transition takes place without any shocks.
German banks welcome an upturn in interest rates. Are there people in other countries who stand to lose out, for example because the number of credit defaults will rise again?
This isn’t a question of geography; it’s to do with the business models of individual banks. Don’t forget: the ECB’s Governing Council has indicated that the transition to higher interest rates will be a very gradual one. Interest rates are currently nowhere near high enough to trigger an increase in credit default rates.
Existing stocks of non-performing loans (NPLs) are large enough as it is…
We have made great progress on this issue over the last 18 months. In that period, the non‑performing asset ratio for the banking union as a whole has fallen from around 7% to 5.5%. Countries such as Italy have also made considerable progress.
Why, then, is the ECB considering applying its new guidance on NPLs to existing stocks?
That’s a long story. We looked at stocks of NPLs when we carried out our comprehensive assessment of banks’ health prior to the establishment of the banking union. Then, a year ago, we initiated a new action plan and looked very closely at those institutions that were particularly exposed. Helpfully, harmonised statistics have recently been established for NPLs. We have asked every bank what its plans are for reducing NPLs, how long it intends this to take, what instruments it intends to use, and whether it has put in place the appropriate organisational structures for the reduction of NPLs.
What has been the outcome of that process?
The banks have submitted their plans to us, and we will now review them very carefully indeed. We will report back to the banks in the next few weeks. In many cases, we will hopefully be able to say that their plans are OK. However, in a few instances, we will have to tell banks that they need to be more ambitious in this regard. In many countries, economic activity is now strengthening again, making this a good opportunity to make progress on this issue.
And that’s why you need the new guidance on NPLs?
This guidance is aimed primarily at new NPLs. We describe how banks should, in our view, deal with this issue in the future. However, these are not mandatory requirements with zero flexibility. If banks deviate from this guidance, they will have to explain themselves to us. If banks present good arguments explaining why they require lower levels of risk provisioning or none at all, that may be acceptable in certain instances. Our proposals are currently still at the consultation stage. We should be in a position to submit a proposal to the Governing Council at the end of this year or the beginning of next year.
But there have also been discussions regarding the application of this guidance to existing stocks of NPLs.
That depends on how successful banks are with their reduction of NPLs. We are currently carrying out a rigorous assessment of banks’ plans. In some instances, we will be calling for more effort, more energy and more action. At some point, though, we will have to make a decision. If, at that point in time, banks are still lagging behind and failing to address this issue properly, we will have to make our expectations clear.
And in that case, the guidance, which is really aimed at new NPLs, will also apply to existing stocks?
We haven’t decided that yet. Banks’ individual reduction plans and our expectations complement each other. Fundamentally, if individual banks’ plans are entirely satisfactory, we won’t have to act. A decision on that will be taken in the first quarter of 2018.
Representatives of the European Parliament have accused the ECB of exceeding its competences by issuing the guidance on NPLs.
In July EU ministers initiated legislative measures on NPLs. They would be binding on everyone. Such rules require the involvement of the European Parliament. But these statutory minimum rules do not explicitly preclude further steps by the banking supervisor in the area of qualitative banking supervision. The standards in our guidance are not strict mandatory requirements, but reflect our expectations.
German banks also have NPLs, in particular in the area of shipping finance. How big is this problem still?
Shipping loans are not only an issue in Germany, and we are keeping a very close eye on these exposures. Shipping is very important for the economy, in particular for trade, and it is extremely cyclical. We have now built up a detailed database of shipping exposures so that we can closely monitor the trends. Without going into detail, in some cases we have taken action at banks.
Do you think that additional provisions for non-performing shipping loans are needed?
That depends on each individual situation. I don’t want to generalise. However, banks need to be aware that this has become a very difficult sector.
How realistic are German banks in their assessment of the prospects for the sector?
Banks – not only in Germany – are now far more aware of the problems, but, of course, there is a certain backlog of exposures, which have gone sour for some of them. We are looking very closely at that – not only in Germany.
Italy has restructured or wound up three banks owing to NPLs. Was that just the beginning or already the peak?
I think things are now on the up. Not because we have completed our supervisory work – there is still a lot to do – but because it is now clear in what direction things are going. There is a Single Supervisory Mechanism and there is more transparency. It is clear to everyone that the Italian banking system is moving in the right direction. The important thing now is that we keep going.
The bank resolutions in Spain and Italy went very differently. Does Europe need more uniform resolution rules?
I think that some aspects of the Bank Recovery and Resolution Directive (BRRD) could still be improved. This applies, for example, to early intervention rights, which are the tools that bank supervisors can use when a bank gets into difficulties. We need more clearly defined intervention rights in the case of early intervention.
What intervention rights exactly?
We need to be able to remove directors or appoint an administrator. It would also be important for the SRB (Single Resolution Board) to be able to approach potential buyers of the assets of a bank prior to a possible resolution. As yet, it is not very clearly defined which actions take place under the normal supervisory regime or in the case of an early intervention. A clear distinction is also important because the SRM cannot make active preparations before this point.
For many banks, the SRB is not primarily responsible. Shouldn’t the national bank resolution rules also be harmonised?
In future it would be advisable to achieve greater harmonisation of the national procedures. The existence of different regulatory frameworks in the banking union leads to inefficiencies and obstructs the creation of a single banking market, which is a key EU objective.
Recently there was speculation that UniCredit and BNP Paribas might be interested in a takeover of Commerzbank. Is Europe ready for large cross-border mergers?
Consolidation has been taking place in Europe for a long time, particularly among small banks – including, by the way, in Germany. As regards the large banks, at present there are perhaps one or two European banks among the global top ten. You might think that there is room for more European institutions in the elite class. It would be quite legitimate to argue that there is room for mergers in order to create more banks that can effectively compete with the titans. Whether the time is ripe for that is a business decision.
That is not just a business issue; the supervisor also plays a role.
It is solely a business issue. As the supervisor, we try to create a sound, safe and transparent environment so that such a thing is possible. We are not opposed to such mergers in principle, provided the business models are sound, and provided the merged institutions are adequately organised and, above all, sufficiently capitalised.
Are you not deterred by the sheer size of such a bank and the risk that it would pose?
In such a case, we would, of course, take supervisory measures that were commensurate with the bank’s size. A few years ago, in the case of a merger of large banks at national level, we demanded a larger capital buffer from the merged institution for precisely this reason. We also consider whether a merger leads to synergies and whether the business model is coherent, and banks, of course, must also consider the costs.
What do you fear more: too many banks or banks that are too big to fail?
Overcapacity in the banking sector resolves itself over time. This process has been taking place for a long time, particularly among small banks. The too-big-to-fail problem is, of course, a direct consequence of large mergers. But we now have tools to match it. This applies, for example, to the extra capital buffers for systemically important banks. In addition, these large institutions are also under particularly close supervision. This is difficult for supervisors, but not unsolvable.
A large banking reform, Basel IV, is nearing completion. How well are European banks equipped for its requirements?
An agreement has not yet been reached, although I hope it is only a matter of weeks. The main thing left is the question of how much the use of banks’ internal risk models will be restricted. When an agreement is reached, the banks will not be shocked. They have had a lot of time to prepare themselves and, in some regards, there will also be very long transition periods.
Mr Angeloni, thank you for the interview.