Interview with RTÉ
Interview of Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Sean Whelan and broadcast on 25 April 2018
Let’s start with an easy one – Brexit.
You said earlier this year that banks need to have their paperwork done - by June effectively - with the ECB and with the Bank of England, depending on which jurisdiction they are going to end up in. How is that process going?
Well we said that for the banks that need a licence within the euro area, for those banks that are locating on the continent and in Ireland – if they want to be sure to have the licence in time, whatever the circumstances, whatever the final agreement is, yes this is what we expect. Obviously we will do our best to address all possible issues on time to help the banks to have a smooth and comfortable transition in their relationships with their customers. But people have to be reminded that it takes time so they have to move early enough.
And are they moving early enough? Are you seeing sufficient volumes…?
Yes. For a number of months we were having more general discussions, and possible potential plans. They were testing our reactions to certain issues but after these discussions, starting at the end of last year, and more this year even, we see plans that are quite advanced - sometimes complete - and we have started working on the licences; and we have been formally asked to provide those licences that may be needed.
The Bank of England and the Financial Conduct Authority have in recent days expressed their concern about continuity of contracts after Brexit and how this will affect banking - such as in futures and options, and insurance contracts. The European Commission says that this is a private sector issue, that the private sector can sort it out. Do you have any concerns about the continuity of contracts after Brexit?
Obviously it is something very important but I believe too that the European Commission is right in saying that it is very largely a private issue between consumers and banks. And a number of banks are doing paperwork which is needed to address this issue. Let’s see what will be done when it is needed if a private solution might not be enough. But for the time being banks have to do their homework, yes.
Let’s move on to the daily regulatory business that you are involved in – specifically, non-performing loans – a big issue for you, and a big issue not just the banks but also for the people of the country given the background here. What is your assessment of the Irish banks’ handling of the NPL issue to date?
Well I think a lot has already been done by Irish banks to address this issue but it is not the end of the effort yet. They have to go on. The Irish banks started before a number of other banks in other countries but they are not yet where they should be so they have to continue their efforts. And there are diverse possible solutions to address non performing exposures. It depends whether the loans are to corporates, to SMEs, to households, whether it is mortgage or consumer credit. And the banks have to find the adequate solution that works within their legal framework and addresses properly the needs of the customers.
There is this extraordinary category of loans that are more than 5 years past due. Are you finding that in any other European countries? Normally mortgages aren’t allowed to get to that stage, are they?
Well they are not expected to get to that stage indeed but it is not only in Ireland to be honest. It happens also in certain other countries in Europe largely because of the crisis. So it has to be addressed because we cannot imagine, we cannot let the banks enter the next crisis with the legacy of the previous crisis. That’s not a possibility. That will be a source of weakness that we should not have. And now is the time to do it because growth is back and it has been back in Ireland even earlier than in many other countries. There will be - one day - another crisis. I don’t know when, I don’t know what will be the issue triggering the crisis. But that is the job of the supervisors - we have to make sure the banks are safe and sound and that they address the legacies of the previous crisis before they go into this period.
You have mentioned in a number of recent speeches the issue of banks recovering security being problematic in many countries. It is perceived certainly here as an issue particularly in property-related lending that it takes an extremely long time to recover security. And banks here seem to be quite reluctant to do that. How does Ireland compare to other states in the euro area when it comes to recovering security?
Well there are some countries where there are no non performing issues at all, because the economy was doing reasonably well and because the banks were strong, during the crisis and after the crisis. So it is difficult to compare with the whole community.
Where it was not the case [and where non-performing loans are an issue] - and it is not only in Ireland of course - then we had to do a lot of work because non performing exposures go beyond supervisors: it starts with the legal framework in the country. Obviously, if there is a very long period of time to address them, to repossess collateral and if the legal framework is slow in addressing issues, and it is in certain countries, then it needs to be reformed.
We spent time doing something that was not totally our work to do, but to help ourselves, we took the time to analyse all the legal frameworks for non performing exposures, the 19 different ones, starting with the countries that were burdened with non-performing exposures and then the other ones. And they are very, very different.
Even certain countries that have no such problems right now should take care of their legal framework to make it stronger for when the problem [of non-performing loans] might happen. A lot of reforms have been undertaken by national legislators: in Italy for example and in Greece and Cyprus during the programme to change the legal framework to make it more efficient. Also what is working very well are out of court fast track solutions - discussions between the bank and the borrower - and solutions are found to make them [the loans] performing again. That is quite often preferable but obviously when the situation has been lasting for a number of years without finding a solution, something has to be done, either repossession of collateral, or the banks make the provisions and consider that that’s a loss. At a certain moment you have to recognise it, if that is the situation. But it is a very diverse situation - diverse in the kinds of loans, diverse in the borrowers, diverse in the countries due to the legal frameworks - so there is no one size fits all. I have no single magic bullet to address the issue.
But in Ireland they did make legal changes. They have a whole lot of out of court systems to speed up the dialogue. And yet the banks by all accounts have not used those and have been very reluctant to repossess and have been putting these non-performing loans on the long finger. They have made the provisions against them but haven’t recognised the losses in very many cases and they have been very, very slow to move.
They have been a bit slow, that I recognise, but they have used the legal framework when it was more easy to use. The problem is that now they have the most difficult part to address. It’s not very easy in any country to address mortgages for example. So solutions have to be found for that.
They blame you for any bad publicity they get here when it comes to repossessing loans or particularly when it comes to selling portfolios to so called vulture funds...
Yes. They always blame supervisors when something is wrong. So if you would like to be popular, you should take another job.
Contrasting the situation between Ireland and Spain though, both countries have had property based blow outs, and yet the non-performing loans in Spain are below the European average, and below the euro area average, whereas in Ireland they are still in double digit percentages. And also from the ECB mortgage or interest rate surveys, we see that Spanish rates are again below the euro area average whereas the Irish interest rates are the highest in the euro area. Is there a direct link there?
No, I would say it is very difficult to compare countries because maybe we do not have enough harmonisation of the legislation in Europe. That’s the situation. We have 19 different ways of doing mortgages in the 19 countries of the euro area. Then we are in the situation that the supervision has to be commensurate with the risk profile of the mortgage. The interest rate, the return for the banks - the margin - is commensurate with the risk of the mortgage.
I think something that I would recommend is to have simpler mortgage products. Complexity is always a source of difficulties. Sometimes mortgages are complex in this country - it is not the only country - but I prefer the situation of my country where it is much more simple. Maybe retailers can consider they have lost opportunities by missing some complexity which might have some benefits in a certain period of time but they might also have made losses in different times. So I would recommend more harmonisation in Europe in this field and simple products for retailers.
Are you thinking of tracker mortgages there?
Well, yes, for example, that’s a complex product.
And it has caused difficulty here...
This is what happens all the time with complex products. They create difficulties precisely because not all retailers are well enough aware of the different niceties and specificities of financial products to identify and mitigate the risk.
Again in a speech a couple of months ago, you said profitability is the number one challenge for banks.
Yes, for all the banks in the SSM, in all countries, the big ones, the small ones, obviously more for the banks that are burdened with non-performing loans. But profitability is an issue, yes.
All the Irish banks tell us they are profitable and AIB, the biggest, and currently, state owned bank; a report at the start of the year, said AIB is perhaps the most profitable bank in Europe. Irish banks charge the highest interest rates. Is there a straight forward connection there?
I would not necessarily say that. You have to compare operating incomes, the net interest rate margin - for sure - on one side but also operating cost. Investment needs to be made in IT for example to make banks not only profitable today and tomorrow but also in a sustainable fashion.
Glad you mentioned IT there. You may know there has been a problem with one of the banks here and its IT systems...
One of the things you said in your report in March was that data and IT expertise in boards is lacking across Europe…
How important is it for the banks to have that kind of IT expertise in boards. How deficient are they in IT expertise?
Obviously it is very important for one category of banks, which are the Fintech banks; the Fintech banks being those using -to the maximum - new technology to provide banking services. We expect those banks to have very special and very good expertise in their boards and in their senior management. But it is important for all the banks because a number of bank customers want to have their banking services provided through digitalisation. So banks have to take that into account and be able to offer good digital services to people who want to get their banking services that way, particularly young people. Then the problem is that it cannot be just a window for attracting customers. It has to be plugged into the internal IT of the bank, which is fully ready to act and produce the information which is needed in a very modern and appropriate fashion as well.
Some banks try to use short cuts like outsourcing, for example, but outsourcing is also a source of risk. They have to make sure they have enough control of the services they are receiving. Otherwise, there might be difficult situations if there are problems.
We also have to consider that Fintechs, not necessarily banks, but the big Fintechs of the planet, are in payment services capturing part of the business and the incomes of banks. And if the banks want to compete properly with these new actors, they have to be better at IT. They also have to be better at IT because IT is a source of risk. Cyber risk, cybercrime is increasing. As supervisors we have to take that into account as well and to ask the banks to take it seriously. When they have incidents, I certainly don’t want to comment on any individual bank, I know they are fixing their issues with the people in the Central Bank of Ireland, but it is a reminder to all the banks everywhere that they have to be serious about IT and they have to make appropriate investments in IT.
One of the things that cropped up in recent years here with the crisis was that banks seem to be very slow at being able to extract information out of their information systems, information that most people would assume they would have been able to get very quickly. And a lot of people said they didn’t believe them when they said that their systems don’t produce that kind of information. I gather in your supervisory work, you see this as quite commonplace in banks across Europe, that older information systems didn’t capture information that is now required for proper management. Is this a serious issue in banks, a serious weakness at the heart of them?
Well, for sure, it is a weakness - the degree of seriousness depends on the banking group, depends also on whether they have been the product of a previous merger for example: groups that develop by merging a number of entities and then did not make sure that the IT of the different entities was consolidated at the appropriate level, and did not talk to each other. That’s an issue, a source of problems, of course.
The issue is also due to the fact that we have had a long crisis and during the crisis, IT was not the top priority of the banks. Maintenance of IT was not the top priority. Then after the crisis, if the banks were burdened with NPLs, if the banks had profitability issues, well it was also not exactly the top priority to invest in IT. So now it is definitely the time, like for NPLs, to be serious about it and to make the appropriate investment. And outsourcing can be used for certain elements but it’s not the global solution of the problem. Banks have to be in the driving seat for IT products, systems and procedures.
Given these difficulties and failings in the banks; given the particular situation here; and given the widespread human misery here caused by bank failures, do you think bankers are justified in asking as they did at the AGM of AIB, for bonus payments to be restored, bonuses which have been blocked by the government here since I think, 2010. The bankers were getting great big bonuses before the crisis and they want them back now. Do they deserve them?
Well that’s why we needed a regulation on bonuses and compensation packages. Because they were really incentivised to take risk without considering what could happen with this risk. So now we have a good regulation in place; and is it the moment right now to think about restoring bonuses when you still have work to do to clean the balance sheets before the next crisis? Definitely not, in my view.
So the government should hold the line there and oppose them?
Well a number of banks need to get authorisation, … they need to get authorisation from the Supervisory Board of the SSM to deliver these bonuses or to pay dividends because we consider that they are not strong enough to be doing that. So these banks will have to ask for authorisation and they are likely not to get it. I can’t speak for the Supervisory Board because it is a board with 25 members and will decide through majority of the votes but knowing my colleagues I have not much doubt on the outcome of such a discussion.
So whatever the banks want, they have to work for it?
Exactly. When they have addressed the legacy of the previous crisis, totally and fully, then they can consider compensation for these outcomes. And if they are to improve the situation of the staff working in the banks, it’s definitely to give good incentives to people to address NPLs - so the people working on NPLs, for example, are the ones that should get bonuses, or those who are working on the previous weaknesses, are the ones who should get the bonuses. And for the time being not the ones developing the risk of the bank.