Interview with To Vima

Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Agamemnon Markou and published on 25 February

Ms Nouy, following the interim comprehensive assessment of 2015, Greek banks are now undergoing a new stress test. What progress has the Greek banking sector made in the past two and a half years?

Indeed, we must acknowledge that the efforts of Greek banks since 2015 have started bearing fruit. Capital levels are currently well above the regulatory requirements, with the aggregate Common Equity Tier 1 (CET1) ratio of the four significant Greek banks standing at 17.2% in September 2017 and individual CET1 ratios ranging from 16.8% to 17.8%. Considerable progress has also been made with internal governance. The boards of directors have been overhauled and the skills of the various committees have been enhanced and their independence strengthened. Gradual progress is being made in reducing the very high stock of non-performing loans (NPLs). But dealing with NPLs in a sustainable way is still very much a work in progress. Greek banks must do more and do it faster.

The European Central Bank (ECB) agreed to bring forward the stress test following a request by the IMF, which estimated that Greek banks would need new funds amounting to €10 billion in order to get back on their feet. What do you think of this estimate?

The exercise has merely started and we don’t have a crystal ball. So, one cannot predict the outcome of the stress test; and, as supervisors, we can only rely on our own assessments and conclusions. As you know, the main reason for conducting the stress tests is to get an updated assessment of the resilience of banks under baseline and adverse conditions. As we have already announced, we will make the outcome of this exercise known in May, ahead of the conclusion of the European Stability Mechanism’s third economic adjustment programme for Greece, so that any follow-up action, if needed, can be taken in good time.

Following the announcement of the stress test’s assumptions, analysts were surprised to see a sharp fall in real estate prices under the adverse scenario, given the fact that a cumulative recession of only 3.3% was foreseen. What do you think about this?

The scenarios are not designed by ECB Banking Supervision; they are decided by the European Banking Authority (EBA), in collaboration with the European Systemic Risk Board (ESRB). Those are the institutions that are best placed to respond to your questions. The narrative of the adverse scenario reflects the systemic risks the ESRB General Board has identified as representing the most material threats to the stability of the EU financial sector. For Greece, the projected decline in real estate prices in the adverse scenario reflects the vulnerabilities of the Greek economy.

If the ongoing tests identify new capital needs, which factors will influence, first, the time to be granted to bank management to meet these needs and, second, the tools to be used?

First, let me remind you that this EBA stress test is not a pass or fail exercise. So the need for a recapitalisation will be decided on a case-by-case basis by the ECB’s Supervisory Board for all the banks undertaking the EBA stress test. Then, if needed, and in the light of experience from previous exercises, banks which need to address capital shortfalls will have a couple of weeks to produce a capital plan and a few months to cover the shortfall with private money. It is only if the private recapitalisation fails that a precautionary recapitalisation with public money may be considered.

Do you consider that the Greek banking sector is now safe?

The situation of the banking sector has improved, as I mentioned, but more needs to be done. As I explained at the ECB Banking Supervision annual press conference earlier this month, a judicial environment where you can have an efficient workout of NPLs is important: the quicker the workout, the higher the recovery rate.

As the third adjustment programme is coming to an end, there are many discussions under way on whether Greece should aim for a “clean” exit to the markets or remain in a state of controlled protection, under a precautionary support programme. In your view, what would be the best scenario for the banking sector?

It is not for me to say whether Greece needs another programme or not. That decision lies in the hands of the Greek government.

If the stress tests confirm the banks’ capital adequacy, do you believe that this would create conditions for deposits to return to the country quickly and for capital controls to be lifted? Or won’t this be enough?

Clearly such an outcome would enhance confidence in the banks. And the banking business is all about confidence. So it will be a strong signal to all stakeholders, including depositors. Regarding the relaxation of capital controls, the key factors are depositors’ confidence and banks’ ability to finance themselves on the markets. The consistency and predictability of the government’s economic policies during the post-programme period, especially its commitment to continuing the process of reforms, will be an important factor that will be monitored by depositors and markets alike. Currently, we are seeing a gradual return of deposits to Greek banks and a further easing of capital controls, both of which reflect a continued improvement of liquidity conditions for the Greek banking system. These are encouraging signals.

According to Greek banks’ operational plans, non-performing exposures (NPEs) are to be reduced by as much as 40% by the end of 2019. However, the volume of non-performing loans will remain high even after this adjustment period. How can the banking system again focus on traditional activities and avoid this inward-looking behaviour resulting from the management of loan losses?

Reducing the NPEs by such an amount is more than just the start of a virtuous circle. If achieved, it will represent very significant progress, putting banks in a better position to fund the economy and thus supporting economic growth. If such an improvement is achieved by 2019, then banks will be better able to dedicate their resources – funds and personnel – to their traditional business, while at the same time also investing in much-needed innovation.

If your proposal for the NPL stock goes through, Greek and Cypriot banks will be severely affected. How do you think they would manage to deal with this challenge?

As far as the stock of NPLs is concerned, this is a work in progress. The Supervisory Board has not yet met to discuss this issue, so let’s wait and see what is decided. That being said, reducing the stock of NPLs will also have important benefits for the banks and the economy. For Greece, this means that further efforts are needed to reduce the stock. Greece has passed new laws that will facilitate the workout of NPLs, which is encouraging. However, passing laws is just the first step; they also need to be implemented and applied. And here, it seems that things could move faster. For example, an effective and efficient implementation of e-auctions is essential.

If banks don’t achieve the set targets, what might this mean for the system and the safety of deposits? What measures can the supervisor oblige banks to take?

On a case-by-case basis, supervisors can take various supervisory measures, such as requiring higher provisions. But I think that the banks are determined to achieve their objectives and I am optimistic that they will manage to do so, provided that the legal and judicial obstacles to an efficient workout of NPLs are removed.

Do you believe that the creation of four systemic groups has completed the concentration of the domestic banking sector, or could new mergers be expected in the future?

Generally speaking, in the euro area, consolidation – including cross-border consolidation – of the banking system would help reduce excess capacity and make banks more profitable. In Greece, as in the other euro area countries, the desirable level of consolidation depends on each bank’s capacity to be profitable over the medium and longer term.

Pre-provision profits of Greek banks are among the highest in Europe. Does this show that competition is distorted?

No, it means that the Greek banks have good profitability capacities, which are currently cancelled out by the need to provision NPLs. That is why the top priority for Greek banks is to significantly reduce the production of new NPLs -by improving their credit underwriting criteria- and to clean up their balance sheets. Once this has been done, they should be able to return to profits.

Despite the major steps taken towards a European banking union, there is still no common deposit insurance scheme in place for all the participating countries. How far away are we from the finalisation of this pan-European reform?

Political deadlock has impeded progress on a European deposit insurance scheme – EDIS – for too long. In this regard, the latest proposal by the European Commission is a welcome move. Over the past few years, banks have made progress in reducing risk; therefore, in my view, we could take EDIS a step further. That’s why I welcome the latest proposal by the European Commission, which goes in that direction. However, we should remain committed to our final goal of a fully mutualised EDIS. And risk reduction in the transition to a fully-fledged EDIS should be based on conditions that are precisely defined ex ante, objectively verifiable, realistically achievable and legally linked to the transitions between the phases of EDIS.

Is there a national bias in the Supervisory Board? How about the cooperation with your colleagues from the Bank of Greece?

Our job is to serve our common European objectives and mission. In fact, we have the best of both worlds: the knowledge and expertise of our colleagues in the national competent authorities – like the Bank of Greece – and the distance of the decision-making process. The cooperation with our Greek colleagues is very productive and I thank them for their excellent contribution to ECB Banking Supervision.

Your mandate as Chair of ECB Banking Supervision will come to an end in a few months’ time. How would you assess your term in office? Is there something you regret or believe could have been done differently?

I am proud of what I have achieved with my colleagues. When I moved to Frankfurt in January 2014 there were only a handful of us. In just ten months we managed to create the world’s largest banking supervisor, built on the best supervisory practices within Europe and beyond to deliver tough and fair supervision. Banks in the euro area are now safer and stronger: their capital levels increased to 14.3% in the third quarter of 2017, from 11.6% at the end of 2014. Their NPLs were down to €760 billion in the third quarter of 2017, from €1 trillion when we started our supervision in late 2014. Of course, you can always do things differently and possibly better, but we did what we were tasked to do and we did it at lightning speed – we achieved what in normal times would have taken decades.