Interview with Bloomberg

Interview with Ignazio Angeloni, Member of the Supervisory Board of the ECB, conducted by Nicholas Comfort on 18 March 2019 and published on 20 March 2019

You have been involved in ECB Banking Supervision since the outset. What are you most proud of?

We contributed to the creation of a European authority in an area where none existed but one was needed. Banking is becoming more and more European. It was clear at the time, and is even clearer with hindsight, that national authorities, despite their experience and wealth of resources, are no longer sufficient to guarantee safe and sound banks. That’s where the European authority had to step in, and it is clear to everyone that ECB Banking Supervision marked a step forward in terms of quality, credibility, independence and accountability. The banking union isn’t complete and there’s a lot to improve, but we can be happy with what has been accomplished.

What would you change if you could go back to when the Single Supervisory Mechanism (SSM) was devised?

In 2012 and 2013, we accomplished what was possible given the degree of consensus and limited knowledge of what the future would bring, as well as the different views and styles of supervision in different countries. One area where much more is needed is macroprudential policy. That’s the main lesson of the financial crisis and the biggest disappointment of post-crisis reforms. There has been very little use of countercyclical instruments during the credit upswing. Part of the reason for this is that the SSM Regulation gives the ECB very little power in this field. It remains largely under the control of the national authorities. Some have used it, but not to an extent that I would see as significant, knowing that after an upswing in the credit cycle one can expect the cycle to slow down again. We haven’t built sufficient buffers. What is needed is a rethink of the structure to assign more leeway to the European level, because systemic risks extend across countries.

How prepared are banks for Brexit and what is the scale of the task facing ECB Banking Supervision?

We’ve done a lot of work, both with the large banks establishing or enlarging their position in the euro area, and with the less significant institutions which will be directly supervised by the national authorities. We expect seven significant institutions to come under ECB supervision at the outset, of which we already oversee three. There will also be some 17 new less significant institutions. That will require some strengthening of our resources. The seven large institutions will bring about €1.2 trillion of assets under the supervision of the ECB. Large investment banks will also come under ECB supervision at a later stage, which will add more assets, once the legislation is approved. The scale, scope and business style of these new global players is something we’re not used to. It will require an extension and adaptation of what we do. Bringing in those players should enrich the structure of the financial sector, which will be important now that Europe wants to build a capital markets union.

You spent much of your time on the Supervisory Board focused on banks that enter crises. Does the possibility of a precautionary recapitalisation of Banca Carige, a comparatively small bank, with Italian taxpayers’ money undermine European laws on preventing bailouts?

In my understanding the decree law allows for the possibility of a precautionary recapitalisation, but it has not yet been declared that it will be used. A precautionary recapitalisation is one of the instruments foreseen by the Bank Recovery and Resolution Directive, so just demanding it doesn’t undermine it. It also comes with conditions and modalities. If those weren’t followed, then yes it would be undermined, but it has not been the case in the past and I don’t expect it to be the case in the future. The contours and boundaries within which one has to move are quite precise. Carige has decreased in size in recent years but still plays an important role in the local market, so it would require a certain level of attention.

What’s next for Carige?

The bank’s temporary administrators are at work and we will see what sort of offers they receive and assess their proposals. We have indicated that it would be advisable to find a partner and I think finding one would be a good outcome. But we are not the architects of the system. We receive business proposals from the banks and we assess them with a view to ensuring that they are sustainable over time.

Several Italian banks have issued more ambitious targets to cut non-performing loans (NPLs). Are we there yet in terms of the level of ambition?

The NPL project has been very successful. The numbers speak for themselves. Our idea right from the beginning was to put banks in the best position regarding their asset quality before the next downturn. An economic slowdown is unfortunately now materialising, but a lot of progress has been made in the meantime. The process is now more self-driven and there’s no longer the need for the supervisor to be as involved in pushing the banks forward. There’s also now a market for NPLs. By and large, the banks have understood the guidelines; they’ve followed them and are now moving by themselves. The key is that those plans are ambitious yet realistic.

How closely is the ECB looking at recent reports on anti-money laundering lapses at banks?

Money laundering is something that we haven’t seen the end of yet; there are cases that come up almost every day and which we look into. We’re in a phase of exploration and assessment. Some of the events happened a long time ago, but not everything relating to them has been discovered. Anti-money laundering isn’t part of our mandate. We look at the banks, at their books, from a prudential perspective. We don’t have the mandate to assess their customers. There is more contact between prudential risks and money laundering risk than one may think. There is an inherent conflict of interest at the banks. A banker always welcomes fresh money coming in, so there’s an incentive for the banker, maybe even more so for those who are already in trouble, not to be too careful about where the money comes from. We’re working, together with other European authorities, to implement the guidelines put forth by the European Commission. This means making sure that the information we gather as part of our supervisory mandate, if relevant, is speedily transmitted to the relevant national authorities. But in the end, the solution is a European authority with European rules and instruments. It will have to come at a certain point in time.

Talk of big bank mergers is intensifying in Europe. Have we forgotten the lessons of too big to fail?

We have not forgotten and we have the problem clearly in mind. The response to this problem is twofold: macroprudential instruments, like systemic buffers; and the resolution plans prepared by the Single Resolution Board, with the minimum requirement for own funds and eligible liabilities and the requirements on total loss-absorbing capacity. A lot has been done on both counts, but it’s not finished. When a merger involves the acquisition of qualified holdings, we as the supervisor have to approve the operation from a prudential point of view. We receive the business plan of the merged entity, and to approve it we have to be convinced that it is safe and sound.

Does the ECB have a preference for cross-border mergers?

No, we’re a prudential authority; we are not supposed to tell banks which mergers they should embark on. Of course, we are part of a set of European institutions that regard integration as a positive, desirable goal. So we’d welcome sound cross-border mergers.

Are there still regulatory impediments?

Some people say banks can’t merge because the ECB prevents it, but that’s wrong. The main reason banks find it difficult, beyond the uncertainty of cross-border activities, is that they still can’t reap the full benefits of a merger given the current state of the law. They can’t manage their liquidity and capital effectively between countries. Those impediments need to be removed to make big banks more European. We’ve done what we can with supervisory options and discretions, but many more remain which are controlled by Member States. There’s also the lack of a common European deposit insurance scheme, which leads host countries to seek to ring-fence their markets.

Have you rejected such plans in the past?

We have rejected merger plans in their original form. Take Italy’s Banca Popolare di Milano and Banco Popolare, which was quite big for a national context. We asked for a significant capital increase, and it was enacted. We tend to be rather strict, but each case has its own characteristics. In every case, the answer can be: “that may not be sufficient and you have to do something more”. That means making the business plan more realistic and drawing different conclusions in terms of the capital and liquidity you may have, and then maybe asking for a new capital increase to make it sound.

How important is the ability to execute, for example on job cuts needed for cost savings?

It’s a case-by-case issue, but of course we have to assess whether the business model is realistic. You often see a certain amount of optimism when these plans are presented. That’s natural; banks tend to paint a rosy picture when they present themselves to investors. And it’s up to us to make sure things are safe and sound.

Can Deutsche Bank and Commerzbank expect a rigorous review by the ECB if they pursue a merger?

Like any other bank, they should expect a rigorous examination, yes. The ECB won’t prejudge, though, it will use all the tools of prudential analysis to ensure that anything that comes out is safe and sound.

How concerned are you that some banks engage in activities that allow them to report a higher leverage ratio at the end of a quarter than they maintained in reality over the course of that quarter?

We look at window dressing with some concern because leverage ratios are an important tool. We would be in favour of calculating them using averages, particularly given how repos can be used to calculate the aggregate. But that’s a global discussion. The leverage ratio complements the risk-based capital requirements, and another concern is that European law continues to allow banks to exclude items from the leverage ratio calculation. Take administered savings in France. These cases might not have immediate prudential relevance, but they are a breach of the logic of the regulation and may create future problems. Everything should be in there and there shouldn’t be exceptions.

How important has the ECB’s targeted review of internal models been in restoring trust in risk models devised by banks?

It is very important, not only from a prudential point of view, but also strategically. Checking the models underpins the European approach to risk-based supervision. The purpose of the exercise is not to have an impact on bank capital, but to execute a thorough check on bank risk models. That said, although it is too early to have a definitive overview, as the project is not completed yet, I think that there will be an impact in terms of capital ratios, more significant for some banks. The main impact will probably be in the part of the models which reflects the loss given default and probability of default. The issue one finds in some cases is that the calculation methodologies are too optimistic. But it does also happen that we see banks come out better by very small amounts.

When you leave, just one of the four ECB-appointed seats on the Supervisory Board will be filled. How can that deficiency be addressed?

There is room to strengthen the role of the ECB representatives in particular, as they can be considered the most European-minded core of the Supervisory Board. It is regrettable that positions have remained vacant. When we contributed to the European Commission’s first drafts of the SSM Regulation, we thought it would come naturally for those members to play an important role in the management of supervision. It would have been better to make that a little more precise in the regulation. It currently lacks a clear indication of what the roles of these members should be and doesn’t give them enough of a profile to perform their function.

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