Interview with OPEN TV

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Eleftheria Arlapanou and Spyros Dimitrelis on 9 July and published on 10 July 2019

Mr Enria, welcome to Athens, welcome to Greece and thank you for this opportunity to talk about the Greek banking sector. Non-performing loans (NPLs) are a hot topic in the euro area, especially in southern Europe. How worried are you about them, especially regarding the situation in Greece?

The issue of non–performing loans is a major legacy of the crisis. The ECB put forward significant policies to address this issue and we have made great progress recently. We had €1 trillion of NPLs in 2014 and this is now down to €580 billion. Still, the NPL ratio, the ratio of non-performing loans to total loans, is relatively high, especially in some banks and in some countries such as Greece, and further progress needs to be made. For Greek banks, the ratio of NPLs to total loans is still about 40%, so concerted efforts are needed to deal with this issue.

Yes, but could you say that the Greek banks are on a good track in dealing with this issue? Are they sufficiently addressing their NPL problems?

I must say that there has been progress here in Greece. Greek banks have set targets to reduce their NPLs and they respected those targets. Over the last two years, NPLs were reduced by a quarter, by 25%, which is significant, and the banks have also set up relatively ambitious strategies for the next three years. Up to the end of 2021, they intend to reduce a further €54 billion of NPLs. This is an ambitious strategy and we support it. Still, even at the end of this big effort, the ratio of NPLs to total loans will remain relatively high: 19% against the current euro area average of around 3.8%. So there is still work to be done.

What else is needed to further strengthen the country's banking system? What are the most pressing challenges for the new Greek government as far as the banking sector is concerned?

I would say that there are three elements.

First, the banks need to focus on achieving the targets that they set for themselves and that we, as ECB Banking Supervision, have supported.

Second, we need to have a legal framework and judiciary processes which are effective and allow a better resolution of NPLs. This will of course need to offer the necessary protection for borrowers, but we need to have processes in which a balance is found and in which banks are supported in achieving certainty on the recovery of their NPLs in a short period of time. Other countries such as Ireland, Spain and Portugal, have managed to find this balance and I think it is important that the government and parliament aim to provide a strong legal framework that supports this objective. I understand that there have been positive developments recently in respect of the legislative framework that needs to be put into effect efficiently in the near future. 

Third, even with the best efforts of banks the ratio of NPLs is going to remain very high. So I think that if you really want to turn the page and put the Greek banks in a position to support the economy, more systemic solutions need to be designed and identified. I know that the Hellenic Financial Stability Fund and also the Bank of Greece have proposed interesting suggestions to have more radical approaches to deal with NPLs and I am very supportive of these proposals.

Do you think we are close to the full lifting of the capital controls?

Much progress has been made with the ending of the programme and with the Greek banks’ exit from Emergency Liquidity Assistance. Deposits are flowing back to the system and I think the Governor of the Bank of Greece has mentioned that the capital controls will possibly be lifted towards the end of the year. It’s not up to us as the ECB to express a view on this point, it is up to the national authorities, but we will be supportive.

Are you worried that the macroeconomic environment of perhaps lower growth than initially projected could eventually slow down the reduction of NPLs at the targeted rate?

First of all let me say that the more positive macroeconomic outlook in Greece, the reduction of the sovereign spreads, and the increase in residential real estate prices are opening a window to accelerate the resolution of NPLs. It is important that banks carry out the maximum possible repairs when the sun is shining.

Of course, if there were to be a deterioration in the macroeconomic outlook, things would become more difficult. This is something we generally test in our regular stress test exercises, so we should prepare for negative outcomes but at the same time do our best to exploit the positive outlook that we have now in Greece.

Is the current degree of concentration in the Greek banking sector sufficient? Would you deem as probable the entry of new players in the Greek banking market via cross-border mergers?

It’s not up to us, as banking supervisor, to have business policy objectives and to say whether there should be this or that merger.

I would make this comment more generally for the banking union, for the euro area, and I think that there is excess capacity in the euro area banking sector. In every sector in which we had a major global crisis in the past, like in the automobile sector or the steel sector, the excess capacity was reduced after the crisis through consolidation. In the banking sector in the euro area this has not happened yet, and we see low profitability in the banks, low market valuations and very low price-to-books ratios. This shows that investors are not really convinced that the European banking sector is going to be profitable in the near future. So, consolidation could be part of the strategy to restore profitability in the system.

Is Europe today closer or further away from a complete banking union? What more would be needed? Could the European deposit insurance scheme (EDIS) have helped avoid the developments in the Greek banking system in 2015?

We have made a lot of progress in the banking union since the establishment of the Single Supervisory Mechanism, which is now up and running, with good cooperation between the centre in Frankfurt and the national competent authorities. The Single Resolution Board has been established and recently there has been political agreement on a fiscal backstop for the Single Resolution Fund, which is an important achievement. Still, the construction is not finished. As you correctly mentioned, we still miss the EDIS and I think that we are still in the middle of the river and we need to cross it and to take the last steps to complete the construction before the rainy season starts.

So, it is important that we try to find agreements at the political level also on the EDIS. It is very important because depositors need to be reassured that they have the same amount of coverage, whether they hold their deposits in a bank in Greece, in Italy, in Germany, in Finland or in Portugal. Euro deposits should be protected in the same way across the euro area.

Mr Enria you had the luck to be the first European official that just an hour ago met the new Greek PM. What was the context of your conversation? 

It was simply a meeting to become acquainted. I was very glad I had the opportunity to meet him so soon after his appointment, and we had a general conversation about the banking sector and the developments in the euro area.