Interview with La Stampa
Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Alessandro Barbera and published on 1 May 2019
Mr Enria, you have always believed in the European project. But various problems are emerging at present. For example, the application of the “bail-in” principle, which requires shareholders and bondholders to foot the bill if a bank fails. Do you still think this was a good idea?
This principle was and still is right. I remember the events that led to its introduction ‒ during the crisis, while countries were asking for European programmes to save their banks from failing, those same banks were continuing to pay out interest to holders of their subordinated debt. It is right that private investors should be the first to bear the costs of a crisis, that depositors should be protected and that the need for government intervention should be reduced to a minimum.
But isn’t it true that in many cases bank failures have caused greater damage than a publicly funded bail-out?
It takes time to apply the principle effectively. The banks need to have issued a sufficient amount of financial instruments capable of absorbing losses, and those instruments need above all to be in the right hands. They shouldn’t be sold to other banks, as this could lead to contagion, nor should they be sold to small investors, who are not in a position to judge how risky they are: there is now regulation in place that makes it possible to set a €50,000 threshold on investments in certain categories of bonds. But one thing that I would like to make clear is that the only case we have had of a bank being resolved under the EU Directive is that of Banco Popular in Spain. The biggest problems have arisen in the winding-up of small and medium-sized banks that are still being managed at the national level.
Let’s take a concrete example, the failure of Veneto Banca and Banca Popolare di Vicenza. They were wound up at some cost to the economy, but the bail-out still cost taxpayers dear. Why is that?
We can learn from the system in the United States, where it has been possible for a considerable number of banks to be wound up and exit the market without consequences for either depositors or taxpayers. Public authorities there can take control of failing banks and manage the winding-up process in a flexible manner, for example by selling assets and liabilities to the highest bidder, which is often a bank in another state. But we should remember that also in the US investors can incur losses. It is illusory to think that no-one will lose out in the event of a bank failing. But credible and flexible winding-up procedures can minimise the impact on creditors and avoid the need for taxpayer involvement.
The judgment of the European Court of Justice (ECJ) on the case of Cassa di Teramo confirmed that the European Commission has sometimes been too strict. It said that this case constituted state aid, but that there was no state aid in the case of the other banks. What’s your view?
The ECJ’s ruling opens up the possibility for deposit guarantee schemes to be used to facilitate the orderly winding-up of banks. I think that is useful. But regulation and practices continue to differ greatly from country to country and may have to be assessed to ensure that they comply with European rules on state aid. We need to develop common criteria ‒ ones that are not subject to the rules on state aid ‒ to facilitate the restructuring and winding-up of banks that are in trouble. Two years ago I proposed a European instrument for the disposal of what are known as non-performing loans. The same thing should be done for the winding-up of banks, which should be managed by the European resolution authority. We need to have common rules and a European mechanism for winding up banks. That would avoid many of the problems we currently face.
So, if someone were to say that Europe has too much power and is the cause of the problem, your response would be that it doesn’t have enough power and that it can in fact be the solution?
It may seem strange to you, but yes.
The merger between Commerzbank and Deutsche Bank has been shelved, but European mergers are needed. If you add up the stock market value of the ten largest euro area banks, it is still below that of the biggest US bank. How can that be possible?
The profitability of European banks remains low, and is generally below their cost of capital, and their market value is well below their book value. In these circumstances, it is difficult to attract investors. But some banks in Europe are doing better than others. Some of them have managed to reduce costs, invest in new technology and clean up their balance sheets quickly, and this is the direction in which we are pushing. But we need to recognise that there are also structural impediments ‒ with few banks having exited the market, there is still an issue of excess capacity which is holding back a recovery in profitability. In addition, markets are still segmented along national lines, and this lack of integration prevents efficiency gains from being made. A process of consolidation would be useful.
So there’s a need for mergers between banks in different countries?
It is not our task to determine what should happen. In some cases, better synergies are achieved where there are overlapping distribution networks. Nevertheless, it would be important to remove impediments to cross-border mergers. Consolidation among entities in various countries promotes risk diversification.
In recent months the spread on Italian government bonds has widened beyond the safe threshold and the risk has re-emerged that banks – which hold large volumes of government bonds – may get engulfed by government debt problems. In your view, does this risk being 2011 all over again?
Banking union has been a success. It has strengthened bank capital, reduced impaired loans, and this has alleviated the problem of the doom loop between banks and nation states. That said, we have not yet managed to break the link completely, precisely for the reason I mentioned earlier: banking systems are still segmented along national borders and, unlike in the United States, when a shock hits an individual country, it is not absorbed by banks operating in other countries; rather, the banking system amplifies the shock. That’s why mergers between banks in different countries would be useful.
Would it also be useful to have a limit on government bond holdings, as Germany is calling for?
I am opposed to the application of a strict limit. Instead of solving the problem, it would have destabilising effects. It doesn’t rule out the existence of risks, especially when the exposure is highly concentrated: there are banks with total government bond holdings that are seven or eight times their capital and which should be incentivised to diversify the risk. Another useful aspect could be a more stable and broad mark-to-market accounting of government bond portfolios; after all, these are liquid assets that banks should be ready to dispose of on the market in times of stress as provided for by the international standards and European rules.
Is it true that there has been a considerable improvement in the levels of Italian banks’ non-performing loans (NPLs)?
Yes, that’s the case. In 2018 the gross value of NPLs was down by 28% and, for the first time in many years, the NPL ratio fell below 10%, to 8%. Significant progress has been made, even if stocks of NPLs are still high in some banks. Since the outlook for economic growth has deteriorated in recent months, there is no room for complacency.
Your first act as Chair of the supervisory authority was to place the Cassa di Risparmio di Genova (Carige) under administration. Four months have passed since then, but the issues are far from settled. What is the latest? Will you manage it?
The administrators have drawn up a business plan, sought solutions to clean up the balance sheet and received offers from investors for the purchase of both the bank’s NPLs and its shares. This process is not finished, but I look forward to hearing something by May.
This first intervention led many people to say that you would manage the supervisory authority very differently from your predecessor, Danièle Nouy. Is that so?
Danièle Nouy did a great job of ensuring that European banking supervision functioned from day one and is credible. My task is to guide our institution to a more mature stage. I think that it is important to increase the transparency and predictability of our decisions. We are working with a complex set of rules and, in crisis situations, investors may be called on to absorb losses. This means that we have to provide a clear explanation regarding how we go about assessing the state of health of the banks. Today, for example, the level of transparency in terms of our decisions and recommendations to the banks differs from country to country. I believe we should develop a common approach and harmonised communications strategies, while of course complying with the rules on transparency that apply to listed companies.