Interview with Radio Nacional
Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Cristina Ganuza on 22 October
30 October 2019
How are Spanish banks facing this moment when the economy is slowing down and uncertainty is running high?
First of all, we have to say that Spanish banks have made tremendous effort in improving their balance sheets. They have cleaned their balance sheets significantly. They sold non-performing loans, so their asset quality is now much better. For the banks supervised directly by the ECB, they are now in the same ballpark as the other euro area banks. There is still some way to go, but there has been significant progress. The main issue is the low profitability. As with other euro area banks, Spanish banks are suffering from low profitability. This is to some extent a concern also for us as supervisors, so that's the main weakness that we see at the moment in the banking sector.
During the last financial crisis the government had to rescue some banks. Only two years ago, Banco Popular was declared failing or likely to fail. Will we see similar situations again if the economy slows down faster than expected or a crisis hits?
What we see right now is definitely a situation which is very different from the one that was in place before the crisis. We don't see credit bubbles, i.e. over-extension of credit at very cheap conditions, with very poor quality, very poor collateral. We are doing right now a survey on credit underwriting standards at euro area banks, and in countries, like Spain, which have been affected by a significant crisis, banks are more conservative in their lending policies than banks in other Member States. So we don't see the same conditions apply right now.
About BBVA, I know you have said you cannot speak about concrete banks, but how could this affect the reputation, the image, of the whole financial sector?
As you correctly say, I cannot discuss individual cases. What I would say is that, in general, euro area banks have been very good at repairing their financials, increasing their capital, reducing non-performing loans or improving the liquidity position. However, they have not been equally good in terms of strengthening their governance, dealing with conduct issues, changing their own culture. In these areas we have seen a string of scandals also related to money laundering or mis-selling of products, and banks need to do more.
Are Spanish banks prepared for Brexit?
We have agreed with Spanish banks – and with all other banks which have a presence across the United Kingdom and the euro area – precise conditions that need to be satisfied to reshape the business in relation to Brexit, what we call the target operating model we want them to be on in relation to Brexit. This is the case also for Spanish banks. Banks are prepared. Spanish banks present in the United Kingdom have mainly retail-oriented business there, so their main risk from Brexit is a deterioration in the British economy that might materialise, especially if there is a disorderly Brexit.
You talked about low profitability. The International Monetary Fund has warned about the risk of extending too much monetary stimulus. Are banks taking too many risks in order to improve their profitability in the current monetary policy environment?
The monetary stimulus is commensurate to a situation in the economy which is weaker than we would like it to be, with lower inflation and lower growth. So to some extent, insofar as the monetary stimulus helps improve the macroeconomic outlook, it also helps banks because borrowers will be able to pay their loans back. Banks will also have an opportunity to complete the cleaning of their balance sheets for non-performing loans. So there is a positive aspect, but indeed you are right. When there are very accommodating monetary conditions, banks could be incentivised to search for yield and take excessive risks. That is where supervision should be very vigilant and that's our main focus right now.
But is it happening?
There are some areas in which we see pockets of risks increasing. There are some real estate markets in some countries – not in Spain – which are now, let's say, heating up significantly. There are some markets, for instance for high-leverage loans, which have been expanded quite a lot. That's an area in which we have already asked European banks to strengthen their risk management vis-à-vis this type of product. So, yes, there are some areas in which we see risks increasing.
Also in your last risk assessment for 2020, you say some banks are relaxing lending standards for residential loans. We have here a history in Spain in this regard. Is it happening here in Spain?
As I said, in Spain what we see is actually a contraction of the amount of lending. According to our preliminary results of the credit underwriting standards survey that we have conducted, it seems that banks in Spain are being more conservative than banks in other countries. So we don't see this relaxation of standards at the moment. But indeed it is true that we see banks that are trying to gain market share and to maintain some profitability sometimes adopting relaxed standards. And this is something we are trying to discourage.
Do you think Spanish banks need to merge?
One of the main drivers of the low profitability of euro area banks is the fact that there is still excess capacity in the system, which has not been removed after the crisis. Consolidation would probably help banks in terms of recovering efficiency and becoming more profitable. It is up to the banks to decide in which markets and which conditions need to be satisfied to merge. But in general we are keen to signal that from the supervisory perspective there is no impediment for this process to start. Actually, we think it will be positive for the system as a whole.
In ten days Christine Lagarde will be head of the ECB. How do you see this moment? Do you expect some change in monetary policy? How could this affect the banking system?
We are under a strict separation principle. It's in the legislation. We have a strict separation between the supervision function at the ECB and the monetary policy function. I must say that I was even surprised myself in these first nine months in my job, seeing how strict the separation principle is. There is not a lot of interaction. But having a strong President supporting the action of ECB supervision is an important ingredient. It was very good with Mario Draghi. And from my first contact with Christine Lagarde, I expect similar support from her going forward.
You spoke about low profitability for banks. Do you think we will have to pay for our savings in banks here in Spain?
It would be extremely inappropriate for me as a supervisor to tell banks how they should price their products. That's true both for deposits and for mortgages or any other product that they sell to their customers. It's up to the banks to decide the pricing of their products. What we monitor, of course, is the effect that the pricing decisions of banks might have on the mobility of depositors across banks. We are seeing now some mobility of depositors across countries, with these new platforms that are being developed. So that's something we look into, but the pricing policies are in the hands of bankers.