Interview with Les Echos
Interview with Danièle Nouy, Chair of the Supervisory Board of the ECB, conducted by Pauline Houédé and Edouard Lederer on 3 September 2018
Ten years after the fall of Lehman Brothers, how would you sum up what has happened since then?
We have paid a high price for a lack of regulatory and supervisory rigour before the crisis. Moreover, at that time, the authorities expected more isolated crises, bank by bank, but were not necessarily prepared for a global crisis that would spread to a large number of institutions across a large number of countries. In France, however, the price we paid was not quite as high as we had already experienced a crisis in the 1990s and supervision had become very intrusive for banks and especially vigilant with regard to their risk appetites. Indeed, before the crisis, French banks had better-quality balance sheets and capital than banks in other countries.
Was the United States responsible for the financial crisis?
On a purely practical level, the crisis started in the United States – where mortgage loans were granted under lax conditions and then securitised to be sold to investors – but, in essence, Europe would not have been as severely affected if its banks had not, at times frantically, bought those products. We are not directly responsible for the crisis but we can’t put the blame solely on the United States. The United States was then faster than Europe in dealing with the crisis, taking a “surgical” approach by shutting down the banks that were in difficulty or by supporting the restructuring of the sector. Our approach in Europe was more “medical”, to the extent that, ten years later, we are still at the end of the transition phase for the implementation of new regulations, notably those serving to boost capital levels.
Would it be right to say that the world of finance is a safer place today?
When another crisis occurs – and one will occur – the system will indeed be better prepared to face it. All of the work that has been going on over the past ten years is aimed at making a new crisis less likely to happen, as well as at softening its impact as much as possible if it does. The objective is also to put the necessary tools in place to deal with the difficulties we will face in an orderly way so as to reduce the impact on other financial players and on the economy. That’s why the banks will be better capitalised from now on; why the rules on liquidity have been tightened; and why the new securitisations are far more reasonable. We were able to secure tighter rules – through the Basel III accord and the new accounting standards, which we supervisors had long been calling for. In short, we have created a more independent European banking supervision that reduces national bias.
And have we seen the end of banks being “too big to fail”?
The introduction of the recovery plans presented by the banks and the resolution plans prepared by the resolution authorities, along with establishing the additional regulatory requirements for systemic banks, are all helping to deal with this problem. In Europe, however, banks have not increased much in size over the past ten years, unlike in the United States where the crisis lead to rapid mergers. Moreover, under banking union, the size of credit institutions will in future be assessed against the scale of the 19 euro area countries and no longer against a single country. I would add that we need some “European champions”, i.e. global players with the capacity to cater to the needs of large European firms and to successfully compete against other financial players at global level. Such consolidation would also help to resolve the problem of European banks’ profitability. Some banks are not earning the cost of their capital – this is not a tenable situation in the long term.
On the other hand, the regulators do not seem all that interested in the risks around derivatives, or in sovereign debt…
We are doing what needs to be done with regard to derivatives; we have the required capacity to keep an eye on these transactions. Besides, banks have had much less risk appetite since the crisis and so have less interest in the most complex products, although their interest may pick up again. In my view, however, the European legislator could do more for us in this area by fully transposing the Basel Committee’s reform of the trading book rather than simply focusing on the transmission of information. That would give us better tools! With regard to sovereign debt, we have obviously learnt from the last crisis that there are no such things as risk-free assets. Investors in sovereign bonds can lose their money. It goes without saying that it’s a delicate and highly political issue. We need to make progress on an international level and the responsibility for holding things back does not necessarily lie with Europe.
What are the current supervisory priorities?
First, European banks’ profitability. The banks need to be able to make enough profit to generate internal capital or to raise capital on the market when needed; that implies being able to pay out decent dividends to investors. Second, it’s also very important to harmonise regulations. The legislative framework in Europe is still highly fragmented. This means that the Single Supervisory Mechanism (SSM) has to supervise euro area banks under 19 different legal frameworks. It’s as if the French Prudential Supervision and Resolution Authority (Autorité de Contrôle Prudentiel et de Résolution, ACPR) were to supervise French banks according to different rules for banks in Brittany than for those in Normandy! And finally, there is still the issue of non-performing loans (NPLs)…
Precisely. Will European banks have dealt with them soon?
The level of NPLs on banks’ balance sheets is now €680 billion, compared with around €1 trillion when the SSM came into operation in 2014. We are making good progress but we have still have work to do! After publishing qualitative guidance on the treatment of NPLs, we added our expectations regarding provisioning for the flow of new NPLs: the banks have two years to fully provision for unsecured loans and seven years for secured loans. We are now in the most difficult phase, which involves gradually applying these expectations to the stock of existing NPLs. In fact, there is no reason why loans on a bank’s balance sheet that present the same level of risk should be differently provisioned for on a permanent basis.
Is there a risk of “regulatory fatigue”?
Yes, unfortunately! In my view, this fatigue stems mainly from the rather long period given to banks to fully implement the regulations we began to design ten years ago. We decided after the crisis – and with good reason – to be stricter. Just because ten years have passed and people’s recollection of the seriousness and consequences of the crisis have become somewhat hazy, we cannot now listen to the siren calls of deregulation. Reforms have been stringent, but they were necessary. These new regulations now have to be applied in full before we consider, if necessary, making changes to them. Moreover, Europe is prone to believing that, in financial matters, it is extremely virtuous and that other legislators are less demanding. Well, let me point out that, when the Basel Committee assessed implementation of the Basel texts in 2014-15, the only region of the world to be judged “materially non-compliant” was Europe!
You complete your term of office at the end of 2018. Is there an “ideal” profile for the holder of your position?
The embodiment of the role is important for a young institution like European banking supervision. Together with Sabine Lautenschläger, this is what we have ensured, and it is regrettable that our terms end at the same time, in just a few weeks.
The role nevertheless has a political dimension…
When I ran the ACPR, supervisors communicated relatively infrequently. But, at the European level, and following a financial crisis that has had dire consequences for Europe’s citizens – some people have lost their jobs and their homes – from the outset I made communication one of the focuses of my job, in the knowledge that some of our decisions, such as deciding not to save a bank, may have far-reaching implications. We are accountable and must explain what we do. We carry “political responsibility” for being transparent; this, too, is the reason I always take great pleasure in going to the European Parliament to respond to members’ questions.