“We have more muscle to enforce our goals”

Interview with Anneli Tuominen, Member of the Supervisory Board of the ECB, Supervision Newsletter, 16 May 2018

Anneli Tuominen, Director General of Finland’s Financial Supervisory Authority and member of the Supervisory Board of the European Central Bank, talks about the role national supervisors play in the European system, Nordea’s move to join the banks supervised by the ECB and tighter rules for mortgage loans in Finland.

The largest Nordic bank, Nordea, recently decided to relocate its headquarters from Stockholm to Helsinki to be supervised under the umbrella of the Single Supervisory Mechanism (SSM). What does this mean for the SSM?

This is the first time that a major international and globally significant bank will be moving from a non-SSM country to be part of the banking union. Nordea itself has stated that banks operating under the SSM umbrella have a level playing field and can compete on more equal terms with their peers. I am confident that investors find the ECB’s high common supervisory standards appealing and that being part of the banking union might even reduce banks’ funding costs.

Of course this is a major challenge for banking supervision. It has to show the outside world that it has the capacity to supervise a bank whose assets are to a large extent located outside the banking union. The Nordic supervisors have a long-standing tradition of cooperating well in supervising Nordic banks. It is important that this tradition prevails also in the future.

What does Nordea’s move mean for Finland’s Financial Supervisory Authority, Finanssivalvonta (FIN-FSA)?

Simply put: more work, more responsibilities, major resource implications.

Nordea’s balance sheet is about 260% of Finland’s GDP. That will make it by far the largest bank in the banking union in comparison with the size of its home country’s GDP.

Nordea will be under the direct supervision of the ECB but about 75% of the supervisory work will be undertaken by the FIN-FSA. That means we will have to recruit around 30 people for the supervision of Nordea. It is challenging to find this number of experts locally with the right knowledge and skill-set. This is the first time we will also be recruiting directly from abroad. The fact that we can offer a unique opportunity to help set up the supervisory framework for the biggest bank in the Nordic countries, which is also a global systemically important bank (G-SIB), will help our recruitment process. And naturally the opportunity to work with the ECB helps in attracting talent.

Compared with the national competent authorities, the ECB has unparalleled experience in G-SIB supervision. That is important for the conduct and implementation of supervision.

In addition to banking supervision, the FIN-FSA is the competent authority for macroprudential supervision and will be the home-country supervisor with regard to the conduct of business and anti-money laundering. In all of these areas, there will also be active cooperation with our Nordic colleagues.

Why did you see the need for stricter rules for residential mortgage loans? Why did the FIN-FSA decide to use looser rules for the loan-to-collateral (LTC) ratio for first-time home buyers? Can you see more harmonised rules for residential mortgage loans being introduced across the euro area?

Household debt in Finland is at a historically high level and continues to grow. The purpose of the tighter LTC ratio is to curb debt accumulation. The decision to leave first-time buyers out was intended to maintain their access to the housing market.

I do not see a need for more harmonised rules for residential mortgages in the EU as such but I do see a need for more harmonised definitions of macroprudential instruments. Macroprudential tools can be classified in three broad categories: those that improve institutions’ structural resilience, those that improve their cyclical resilience and those that affect the loan demand of households and non-financial corporations, known as borrower-based tools or instruments.

The existing European legislation, the Capital Requirements Regulation and Capital Requirements Directive IV, has a broad set of tools for the first two categories. But for the third category, borrower-based tools, EU-level legislation is lacking. All we have at our disposal in Finland is the LTC ratio.

I believe there is a need for a harmonised approach to macroprudential tools in the EU even though their application should remain with the national authorities. Introducing such instruments in national legislation is always politically challenging. Therefore we do need European backing.

What is your current assessment of the Finnish banking sector?

The Finnish banking sector went through a major crisis in the early 1990s. The crisis led to a reshuffling of the sector: one major bank disappeared from the market and others underwent mergers and/or cost and personnel cuts, including branch office reductions. At the beginning of the 2000s, the Finnish banks also concentrated primarily on satisfying their customer needs at home; as a result they were fairly risk-averse and thus avoided the pitfalls of the subprime crisis.

Today, the sector continues to be in a good condition. The cost-to-income ratio of the Finnish banks is well below the EU average. In the longer term, as I state in my review of our annual report, its profitability is, however, exposed to changes in the operating environment and the competitive landscape as well as to challenges posed by digitalisation. Institutions have therefore already undertaken major development and structural initiatives. They are also looking for options outside the traditional financial sector.

You have been at the FIN-FSA for more than 20 years and have been part of European banking supervision from its beginning. As the head of one of the 19 national supervisory authorities in the SSM, how did you experience the change from purely national supervision to having the European level added?

I have been very European-minded from the outset. I feel it is to the benefit of a small country. If I were to defend my own market participants on a false pretext it would not be credible and would not produce a sensible end result. We Europeans need to think about our goal: what do we want to achieve? Do we want to enhance financial stability in the EU and learn from the lessons of the recent crisis? Do we want to minimise contagion of stability risks between countries? Do we want to achieve integrated financial and capital markets? Do we want to improve customer protection in cross-border services?

As trust in purely national supervision had eroded during the financial crisis, we needed more centralised decision-making in all sectors, and especially in the banking sector. I very clearly saw the need for the banking union. Naturally, enhanced banking supervision is a challenge for a small integrated supervisor. The supervisory focus is much deeper and more intrusive than what we were used to. But it also means that we have more muscle in enforcing our supervisory goals. Cooperation and dialogue with ECB staff have been excellent from the outset and I highly value the great expertise of ECB personnel.

In your view, where do national supervisory authorities add the most value to the SSM?

They know far better than others the market environment where a bank operates, the national characteristics, consumer preferences, legal peculiarities and relevant competition issues. Naturally, knowing the domestic language also adds value.

They also bring along a slightly more pragmatic and risk-based approach to decision-making. Once we learn to trust each other, we may start to understand that every little detail does not have to go through the same scrutiny. Some issues which never reached my desk or even the desk of the department heads in my authority are now decided by the SSM’s Supervisory Board and even signed by the ECB President. This does not make sense. The process could be streamlined and more delegation introduced, so that we can concentrate our energies on issues that matter. Even though I understand that the decision-making process is driven by legal considerations, I think there is still ample room to simplify our processes: a matter which an internal group is currently addressing.

What do you see as the biggest challenge in having supervision partly on the European level, partly on the national level?

I would not say it is partly on one side, partly on the other. We do this together. One could not perform without the other. Maybe the one thing we must aim for is mutual trust, which means the realisation that we must earn that trust. And earning that trust is a question of culture and expertise, national non-bias but also will. Of course one could argue that reaching common goals calls for still fewer national options and discretions in EU regulation and a higher degree of harmonisation, including for the supervision of nationally supervised institutions. But I do not think that is the key.

Where do you see European banking supervision 10 years from now?

First, banking will be less important, as a result of competition from other sectors and the growth of alternative funding sources. The most efficient banks will survive and they will most likely be the ones that have used digitalisation to the fullest extent. That means supervisors will also need to focus much more on IT and cyber supervision and will need a significant amount of resources with data analytics and IT skills.

The banking union will hopefully be complete 10 years from now, which means that harmonised supervision will be even more important than it is now. And hopefully by then the rest of the EU countries will have joined the banking union.