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Interview with Eesti Ekspress

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Sulev Vedler on 22 August 2019 and published on 28 August 2019

Why is there a need for pan-European banking supervision?

I think this is one of the main lessons of the crisis. Basically, you cannot have a single currency without a single system of supervision. We had cases in which the European Financial Stability Facility and then the European Stability Mechanism had to intervene with European money to support programmes in countries that were badly affected by banking crises, such as Ireland and Spain. This means that you need to have ex ante European controls because, in the event of a crisis, there would be a need for European support.

The risk of a new crisis is in the air. The German and British economies shrank a little bit in the last quarter. Italian growth was zero. We can also see a lot of political mess. How prepared are European banks for a new crisis?

The situation of European banks has improved a lot, also as a result of the common European supervision. If you rewind to when the European Central Bank (ECB) was assigned supervisory tasks in 2014, the main priorities were to increase the capital position of the banks, to improve asset quality and to improve the reliability of banks’ internal models. The banking sector has significantly strengthened in all these areas. Banks are better capitalised and their balance sheets have been significantly freed of non-performing loans. So the situation is much better than it was when we started.

Having said that, of course, we are also preparing for a possible future crisis. We run stress test exercises every year. Last year we ran a stress test together with the European Banking Authority. This exercise simulated a very significant recession in the whole euro area. The banks proved to be sufficiently resilient.

But as supervisors we always need to prepare for the worst contingencies.

Are we ready?

Some banks are more ready than others, of course. The stress test helped us identify the weaknesses in the banking sector and which banks we should ask to increase their capital buffers. And that’s what we have done.

Will we see new bailouts?

According to the new regulatory framework (which was set up after the crisis and is also in line with the G20 agreements), private investors need to absorb losses before taxpayers’ money is disbursed.

There is now a much more restrictive attitude towards bailouts. We have worked a lot on recovery and resolution plans. Banks need to be prepared to exit smoothly from the market.

Having said that, we are still in the middle of the process. I think that some banks have already established sufficient loss-absorbing capacity in their liability structures. Others are still trying to reach the targets which have been set. Progress has been made and we are halfway there.

Estonia is lucky because the last time one of our banks went bankrupt was 20 years ago. But there is a totally different situation in southern Europe. So how do you get rid of the problem of bad loans, especially in Greece, where over 40% of loans have gone bad?

The ECB has designed a very strong policy on how to deal with non-performing loans, how the banks should actively manage their non-performing loan portfolios. This also entails setting targets for reducing non-performing loans. And we have also defined the criteria for banks to write off non-performing loans within a certain time frame. These criteria have now been incorporated into European legislation. This policy has been very successful. When we started, we had more than €1 trillion of non-performing loans in the euro area. At the last reading, we were down to €580 billion. It is still high, but it has been reduced massively. There has been major progress, especially in the last two years since our policies were put in place.

This also applies to Greek banks, for instance: we set targets for Greek banks to reduce their non-performing loans and so far they have met those targets. They plan to reduce them further both this year and next year. We are closely following their progress.

Do we need stronger requirements for European banks? More capital, for example?

I think the framework that was designed as a response to the crisis is a robust one. The last step which has to be completed is the implementation of the last package agreed by the Basel Committee on Banking Supervision. The legislative process will probably start once the new European Commission is in place. Once we have finished this round, I think that the level of capital requirements for the banking sector will be in the right place.

You have seen a lot of European banks and bankers. What are the main differences between banking cultures in different European countries?

There are indeed differences in business cultures, differences in governance, differences in internal controls and different incentives for management. But if you look at banks in Germany or Italy, say, then you have both small cooperative banks operating in local communities only and large cross-border groups that operate across the world and are also very active in capital markets. The cultures of these two kinds of banks can be very different even within one country. Provided that the difference in cultures does not stand in the way of the requirements that we set at the European level in terms of conduct, governance and internal controls, I don’t see this as a problem.

Then there are differences related to the institutional environment. For instance, everybody criticises Italian or Greek banks for non-performing loans, but it’s also true that when a bank in Italy or Greece needs to repossess collateral, the judiciary process sometimes takes a very long time, up to 10-12 years. If you have the same problem in Germany or Denmark, the same process may take six months or a year. So there are institutional conditions that affect the way in which banks operate and we would like to see more harmonisation of these aspects. It has been positive that the Economic and Financial Affairs (ECOFIN) Council has promoted progress in this area.

Finally, let me point out that the establishment of the Single Supervisory Mechanism has removed an important driver of cultural differences: the divergence in supervisory methodologies and approaches used by national authorities.

How much of your work involves the fight against money laundering? In Estonia, but also in the Nordic countries, this topic has recently become very important.

As you probably know, we do not have legal responsibility for anti-money laundering (AML). These responsibilities remain with the national authorities. However, we have seen that cooperation between prudential supervisors like us and AML authorities is very important.

If we go on site for inspections and identify problems in the area of anti-money laundering, we need to cooperate, pass this information on to the anti-money laundering authority and vice versa. That’s why, in line with the new directive on money laundering, we have established cooperation agreements with AML authorities. The ECOFIN Council also approved a roadmap on strengthening AML controls at the European level. We are very supportive of those efforts. We pay increasing attention in the conduct of our tasks to weaknesses in internal governance and internal controls, in the fitness and propriety of bank directors and board members, as this could signal weaknesses in the capacity to fight financial crime.

In Estonia we have the Danske Bank case. Danske Bank is from Denmark and Denmark is not a part of the euro area. Danske only has a branch here, which complicates fighting against money laundering.

I think the new legislative framework has clarified and strengthened the controls and the legal safeguards to protect against such cases.

Still, I think that more can be done. First of all, the directive I mentioned can be implemented in different ways in different countries. It’s very principles-based, and we have already seen that the way in which these principles are applied in different countries can lead to differences which make cooperation and controls more difficult.

Money laundering is by construction a cross-border business. If you want to launder your money, you move it across countries. And if you have a single market, as we do in the European Union, there are no barriers to how you move this money around. So, if we want to be serious about preventing money laundering, I think we need to move to a much more harmonised regulatory framework. Ideally, we should have regulations, rather than directives, which are directly applicable to all banks, and authorities should have very strict coordination mechanisms.

For instance, in the prudential field we have colleges of supervisors for cross-border groups where all authorities sit around the table, meet regularly, jointly stress test banks and take joint decisions on the level of capital and liquidity of the parent company and of each subsidiary. There are very strict cooperation arrangements.

But in the anti-money laundering field we don’t have colleges, for instance. So there are a number of areas where we need to achieve much closer cooperation, if not the centralisation of these tasks at the European level.

Money launderers are always faster, more international and more creative than bank employees, supervisors or investigators.

It’s a difficult challenge. But let’s be clear, there have been a number of cases in which banks have been caught red-handed. We have seen this happening in Europe, with banks being fined significantly for weaknesses in the money laundering area. We’ve had banks which have been suspended from taking on new business because of money laundering shortcomings. There have been board members who have basically been fired because they hadn’t been sufficiently effective in protecting their bank and its customers from these threats. We have seen bank insolvencies. I came to Tallinn from Riga. Last year, a Latvian bank had a liquidity crisis because it was linked to money laundering concerns raised by the US authorities.

I think that the authorities have been much more active in these areas and more attention is being paid to these issues. New technologies can also help the authorities with monitoring. Big data is not something that helps only to make profits; it also helps to catch crooks.

What is the likelihood that a major bank will lose its licence because it violated AML rules?

There have been cases in the euro area of banks losing their licence because of money laundering concerns. So that has happened and could happen again.

But is it possible that a major bank will lose the right to make transactions in US dollars or euro?

If you lose your licence, you can’t make transactions anymore. Full stop. That’s the ultimate punishment.

Access to central banking facilities is not really something that supervisors are responsible for at the ECB. But if there is a serious concern on the money laundering front, the central bank could consider suspending a bank from central banking facilities. That could happen.

We have seen this in the United States. They are sometimes quite strong in terms of blacklisting financial institutions – de facto expelling them from access to the dollar funding market. This would be an extremely severe punishment for the international operations of a bank.

Managers of Swedbank are afraid because there is a risk that the bank may lose its right to make dollar transactions because they violated AML rules. This is a major risk for Estonia too because Swedbank is the biggest bank in our country.

I will not comment on individual banks.

But in general, banks need to understand that getting involved in money laundering is a very serious matter and they might lose quite a lot if they are not strict enough and attentive enough in these areas. They need to be very careful and make sure their internal controls are in good order.

You mentioned big data. Companies like Facebook and Google are taking away some media revenues. Do you think that they can also threaten traditional banking?

The revised Payment Services Directive is opening up access to bank accounts also for non-bank institutions with a view to increasing competition in this area and providing a better service for end users, for the consumers of financial services. I think that this is a positive development.

Banks have reacted in the right way to this challenge, by investing more in new technology, by sometimes partnering with fintechs and sometimes developing their own fintech functions in house. And this has been positive because customers will benefit from this.

But if big data companies want to provide banking services and really compete with banks, then they will need to be licensed, regulated and supervised as banks. If they want to remain outside the banking business, then they may be limited in the scope of services that they can provide.

Let me say this clearly: any player that starts offering a business that might be a channel for money laundering needs to be subject to money laundering legislation. Whether it is a bank, a non-bank payment institution or a virtual currency exchange, it needs to be subject to money laundering controls.

But who is able to supervise companies like Facebook, Google or Amazon? Countries are in trouble because they can't even tax them.

In the banking area, it’s very clear. If you want to provide banking services, you need an entity which is licensed to provide banking services. Only that company can provide banking services. That company needs to be regulated and supervised. That’s the rule. It applies to everybody.

No. There are also cryptocurrencies.

Cryptocurrencies do not provide banking services; they provide payment services. As I said before, payment services are not restricted to banks.

But they are subject to anti-money laundering supervision. The Anti-Money Laundering Directive makes it clear that all virtual currency exchanges need to be subject to anti-money laundering controls. I know that because it was a proposal from the European Banking Authority when I worked there.

So, they don’t have to be under banking supervision?

No, not under our supervision, because they don’t collect deposits, they don’t do lending. They only provide services which are not considered fully fledged banking.

There are no savings protection system or know-your-customer requirements?

A virtual currency exchange needs to apply the anti-money laundering rules directly.

But customer protection is a concern. The European Banking Authority and the European Securities and Markets Authority have warned customers that if they put their money in a virtual currency exchange, they could lose it all. There is no public protection, no guarantee, no deposit guarantee scheme. You might lose all your money. That has been made clear. There have been cases of scams. Some virtual currency exchanges and investors in those areas lost all their money. It’s important that people who put their money into these initiatives know that the value can be very volatile and they could lose everything.

As you mentioned, the US Treasury announced a year ago that a Latvian bank may have been involved in money laundering and financing terrorism. The bank collapsed after that announcement. How could you have protected this bank if those allegations had been false?

First of all, let me say again that we are not an anti-money laundering authority. So we don’t have a direct role to play in these types of issues.

But in general, the best way forward is to have close cooperation between authorities at the European and international level. That ensures that before any authority takes action, the authorities in the other countries involved are informed and can provide their views on the process, and that there is strict coordination and cooperation between all the authorities. This is what happens in the prudential area – we have very close arrangements not only with authorities in the European Union, but also with authorities in the United States and other third countries.

How dangerous is your work? 13 years ago I wrote a story on Andrey Kozlov, who was first deputy chairman of the Russian central bank and who fought against money laundering. He visited Estonia some months before he was killed.

I remember that case.

We cannot rule out cases in which our inspectors could be dealing with very delicate cases and there could be some security risk. We try to provide our staff with the best possible protection in those cases.

It’s not an easy job. Not only for those reasons, but also because people seldom thank you for what you do.

If something goes well, people may say that the supervisors are just creating red tape for the banks and not allowing credit to flow to corporates and households. If things go wrong, we are, of course, the culprits. It’s a dangerous job and not a very thankful one. But I like it. Most of the people doing it are really passionate.

How do you evaluate the banking sector in the Baltics?

There are some areas in which Baltic banks are definitely positive outliers. Capital levels are significantly higher than the euro area average, cost efficiency is better - cost-to-income ratios are lower. Profitability is also generally higher than the average for European banks.

But probably the most delicate areas, those to which the sector should pay attention, involve financial crime, internal governance and internal controls.

What makes you happy?

There are a lot of things that make me happy in my personal life. At work it makes me happy when I manage to work through a big pile of papers and documents on my table.


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