Interview with Class CNBC
Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Andrea Cabrini and broadcast on 7 November
So Madame Nouy, it's been three years since the establishment of the SSM. What do you think was the main impact of your activity? What did you achieve and what are you still missing?
Well, we have achieved a lot, to be honest, starting with the comprehensive assessment, followed by a single methodology, a consistent rigorous methodology for delivering Pillar 2 requirements, additional capital requirements. We have worked a lot on non-performing exposures, which is a key issue for a number of banks in the euro area. But we are not where we'd like to be; there is still a lot to do on this issue, but also on new issues like getting ready for the consequences of Brexit, the London-based banks that could relocate in euro area countries. Also, we don't know exactly what will be the consequences of Brexit, as those consequences depend a lot on the outcome of the negotiations. But still we have to be ready for…
Is this your main concern currently?
I will not call it a concern. Well, first of all it's very sad. I am a European-minded person and to see a country putting an end to this journey towards more integration in Europe is always a sad decision. This being said, for a bank supervisor, it's also an opportunity to rethink the way we supervise large internationally active banks, how we balance our responsibilities, across the countries, for these banks.
Many banks did already ask for a licence?
We have been approached by almost 50 banks, out of which 20 have launched something precise and seem serious about getting a licence or extending an existing licence.
Madame Nouy, the economy is recovering and systemic risk is fading. At the beginning of October you launched new draft guidelines on NPLs. According to critics, this may harm the ability of some banks to support the economy, maybe harm the recovery itself. What do you make of that and why did you decide to launch this initiative now?
Well, we did not say it now; we said that from the very beginning when we started the journey to address non-performing exposures. There was the qualitative guidance first. We said that there will be quantitative expectations for the steady state. So we have been very transparent on this issue. As a matter of fact, I'm a bit surprised by the fact that now is not the right moment because when I was discussing this between 2014 and 2017 with colleagues and bankers in countries where this is an issue, I was told all the time, “Not now, please wait until growth is back because it's only when growth is back that something can be done”. Now growth is back and I am told that it's not the right moment either because that would kill growth.
I don't believe in this at all because it has been demonstrated a number of times that well‑capitalised banks, banks which are not burdened by a lot of non-performing exposures, are the ones that are making loans to the economy. The statistics of the ECB – which are not produced by the SSM but by colleagues in the other part of the ECB – and which have a very good reputation, are demonstrating this precisely. The banks that are struggling to survive with their problems are not the ones that can fund the economy.
Well, the concern is that this might push banks to make fire sales of their assets, leaving holes in their balance sheets and benefiting just a few speculative funds that will buy at very cheap prices.
Well, it was addressed in the conference this morning; somebody said, rightly, to a similar question, that when prices are 13 cents in the dollar, or a bit higher for certain categories, maybe 20 cents in the dollar, we are already in the situation; it cannot turn worse. We have several hundred billions, about €800 billion of non-performing exposures. It's not a market that will offer bargains to sellers. Obviously, it's a market for buyers and it will take a lot of time and a very, very significant reduction – hundreds of billions – before it turns better. So the prices are low. That's a fact and what we are doing is not reducing those prices.
But something that would improve the prices very much is certainty on the recovery, on the repossession of collateral – good, efficient legal frameworks in the different countries. So that's why I praise Italy for changing the bankruptcy laws, the liquidation laws recently. And I'm sure that this is very good news for the banks that have such non-performing exposures to sell.
Now, Italian banks have a large share of the European NPLs and yesterday Ignazio Visco said any time you take an initiative to tackle bad loans, you have to think about the financial stability impact. Did you analyse the impact of these guidelines you are launching?
In fact, yes, we have made different impact analyses on what we are doing. And, again, we are talking about new non-performing exposures, not the stock. So, at a certain moment, what is important for financial stability is to stop piling up new non-performing exposures when you have such a big stock to address.
How about the stock and what can banks expect in March when you are expected to give new measure on NPLs?
To be honest, I don't know because this is work in progress. We have been honest, like we have been since the beginning, on what we are doing, that there will be something coming in March. There are different options on the table; I don't know which one will be considered the most efficient one. We need to do an impact study as well for these elements. What I should say is that we have already managed a lot by receiving the plans from the banks, by having challenged these plans to make them ambitious enough, but at the same time realistic – to be credible – because if we are promised miracles, well, miracles do not happen. So…
Were they realistic, the plans that you received?
Well, sometimes they are so realistic that they are not ambitious. The problem is to get the right balance and this is what we are trying to get to through our supervisory dialogue. And, frankly, it works very well. A lot of banks in all the countries and in particular in Italy, as you mentioned Italy, have made significant efforts to improve the situation and are improving the situation.
When you say that some banks are in denial, which ones are you thinking of?
There are still some banks in denial in all countries where the problem exists. You have, well, all kinds of banks, you have banks that do not really have a problem; they manage to go through this issue. Let me remind you that Intesa was the bank that did the best in the last EBA stress test. You have another category of bank or banks which are banks making a lot of effort to clean their balance sheets. I am not betraying secrets on what has been done by Unicredit – it is in all the newspapers. And you have also banks that do almost nothing, or too little too late, which is almost equivalent to doing nothing because if it becomes too late, it will not change the outcome.
So do you expect these banks will have to raise more capital?
We expect these banks to decide how they will address the issue in a reasonable timeline. Then it depends on their situation. Sometimes it means taking more losses and it may require additional capital. But sometimes they have enough provisions to sell them without a significant loss requiring capital. And sometimes they just hope that something will happen that will make them more valuable. But, again, you have seen the magnitude; when there are hundreds of billions of such assets waiting to be addressed, waiting for more favourable conditions is not reasonable.
Mario Draghi when talking about three years of the SSM said that the banking system here is now stronger and more resilient. At the same time, we see that in the markets banks still trade at a deep discount and there is the scepticism of the investors that are confused by uncertainty about regulatory and supervisory aspects. So they ask for a very high premium to put their money into banks. Isn't this another strong impact of your activity on banks?
I don't think there is much uncertainty about what we are doing: it's everywhere. So supervisory uncertainty is very, very limited if there is any at all on this issue. The poor pricing of certain banks, of European banks compared to US banks, for example, on pricing value or market value is due to the uncertainty about the initiative that will be taken by the banks. When the banks are brave enough to go public, to do something big and say, ‘Well, we will clean our balance sheets’, we will move towards the category of “premium” banks, like the one I mentioned before did. The market is buying the story very well, as a matter of fact. There is a very good equity story to be told by being brave and cleaning the balance sheet.
Well, lastly, Madame Nouy – when the market is asking for stability and transparency of supervision – looking back through the last three years, you've had to manage some very difficult crises including some Italian banks like Monte dei Paschi, Veneto Banca, Banca Popolare di Vicenza. What do you think that your activity did in terms of what the market was expecting in terms of transparency? Looking back, do you regret something about the management of those crises?
Well, first of all let me tell you also that when we are transparent regarding our expectations it's not to be praised – like the fact that we have published all quantitative expectations for the steady state for provisions of credit risk. So it's not so black and white. On the other folders and files – on the names of banks that you mentioned – there are different partners which are involved. And we can consider it only from the SSM perspective. On that we have very strict confidential rules. We are not authorised to communicate information regarding, let's say, weak banks for which we are treating or addressing the situation. Even the publication of our decision of “failing or likely to fail” is not in the legislation.
We have published as much as we could, a little bit after the decision. But we ask the legislators in Europe to give us the possibility to publish our “failing or likely to fail” decision totally when it happens, which we do not have yet. Complying with confidentiality is something very important. In my country and I presume in this country as well, if I am well informed, you go to jail for breaching confidentiality about the situation of individual banks…
…I'm talking about in relation to other authorities like DG-Competition for example. Do you think that it's sometimes a tough or difficult relationship with those authorities – and managing some crises – made those crises worse?
No, not at all; I would say the opposite. I think now we have European authorities talking to other European authorities. So there is a lot of common understanding and a lot of trust because we all work for Europe and for the citizens of Europe, which is our objective. So the cooperation really on all those folders and issues was, in my view, absolutely excellent with the Single Resolution Board (SRB), with the national and also resolution authorities that are working with the SRB, with the European Commission, frankly, it could not have been better.
My final question, Madame Nouy; if the BRRD, the directive about bail-in, has to change then how? How do you see the Banking Union and the missing part of the Banking Union, the common deposit scheme or guarantee?
Well, for me it's very important, the decision. I am a democratic person as well. Legislators have to take the decisions regarding the substance of the BRRD, the Recovery and Resolution Directive. But what I would like them to do is to produce regulation that is immediately applicable in the 19 countries without 19 national transpositions that create uncertainty for investors. Uncertainty for these investors means inefficiency on costs for banks and costs for taxpayers, when taxpayer money is involved.
You asked me also about the deposit guarantee scheme. Well, it's the third pillar of the Banking Union; it is missing and it should be put in place. With Banca Popolare we have a good example: this bank was supervised at European level. It was resolved at European level. And on the Portuguese subsidiary of this bank, if the bank had failed and had not been bought by Santander, the Portuguese deposit guarantee scheme would have had to reimburse depositors. This misalignment is not possible and cannot last for long; it has to be addressed.
But to close with these three years where we started, did you ever feel that you and Mario Draghi – on supervision and monetary policy – were pushing in two different directions?
Absolutely not, never. Never, and at the same time, we practise under separation principles. So whatever would have been my feeling of the situation: still separation. So not at all. The action of the monetary policy part of the ECB has helped the banks a lot to have cheaper liquidity, cheaper funding, and better credit risk quality because the corporates, the SMEs, the European citizen benefited from the reduction in the interest rate. Yes, there was a price to pay in margins getting thinner, but still not to the extent that this was creating risk. And it has produced the recovery that we know right now and this is what is giving me the possibility to exploit this momentum. We have good economic conditions. So all the work that we have done with the banks to improve the situation regarding non-performing exposures starts bearing fruit and could bear even more fruit, faster, thanks to this policy. So I don't think so, not for a second.
Thanks again, Madame Nouy.