Interview with Televisión Española

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Paz Cámara on 22 October and broadcast on 8 November

The Single Supervisory Mechanism will turn five next week. What has it brought to the European banking system?

If you go back to when the Single Supervisory Mechanism was established, there was a lack of confidence in the European banking sector. The level of capital was considered to be too low. There was a huge legacy of non-performing loans on the balance sheets of banks. There was a lack of trust in the internal models banks were using to calculate their capital. There were issues in terms of conduct and governance of European banks. And if you look at where the system is now, I think in all these areas we have made massive progress. Capital is now much stronger. There has been significant progress, also here in Spain, on the quality of bank assets and on selling non-performing loans and foreclosed assets. We are in a much better place now.

These five years have been very important but the banking union is still incomplete. One of the missing pillars is a European deposit insurance scheme. When would this be ready and with which conditions?

You’re absolutely right. Progress has been made but the banking union is not yet complete and has not yet delivered all the benefits that are expected of it. The deposit guarantee scheme is important, not only because it would offer the same kind of protection to a deposit wherever it is in the Union, but also because it is an essential condition to promote the integration of the market in the euro area. For as long as you have national deposit guarantee schemes that have to take the losses if something goes wrong, you will have an incentive to keep capital and liquidity segmented in each national market. This doesn’t allow us to reap the benefits of the integration of the banking union. I think it is important to make progress in that direction. I know it is politically complicated, but I very much hope that the next European Commission will put this at the top of the agenda.

There are other pillars still pending, like having a common European framework for insolvency. Do you think progress can be made during your tenure as Chair?

There is indeed a need to also complete that side of the banking union. This is something I have seen in my first months as Chair of the Supervisory Board of the ECB. When there is a banking crisis, in a number of cases this would not trigger a public interest at the European level and there would instead be liquidation at the national level. And liquidation is very different across countries. There are countries where a bank is liquidated as an ordinary corporate, others where you have an administrative procedure to liquidate the bank, and still others where you even have the possibility of the government getting involved in liquidations. This is a level playing field issue, but for us it is also an issue of what happens when we declare a bank failing or likely to fail. If the conditions are very different then it’s also difficult for us to properly use our tools. So it is essential that we move towards a more harmonised system.

The United States has a very effective system with the Federal Deposit Insurance Corporation, which is working very well. The depositors and users of financial services don’t even notice that the bank is going bust and the management is very smooth. So I think we should follow the example of the system in the United States and apply something similar in Europe.

Are governments responsible for the banking union not being completed yet?

It’s clear that there is an important political process taking place at the table of the European Council. We also have to look at the part of the glass which is full. So far we have put together a single mechanism at the European level for supervision, a single mechanism at the European level for resolution, and a European Single Resolution Fund that is crucial to support the resolution of large cross-border groups across the Union. Recently there has been a political agreement to provide a public backstop to the Single Resolution Fund. That’s very important progress in terms of sharing responsibilities between governments. Still, as we mentioned before, the final step of the deposit guarantee scheme is missing and we need to focus all our efforts there.

In the context of an economic slowdown, are banks prepared?

Banks are much better placed now than they were before the previous crisis. The capital levels are much stronger and we have done a very thorough job in terms of strengthening supervision. We have enacted a number of quite far-reaching financial reforms which have been developed under the aegis of the G20. So the system is much stronger now than it was, but this doesn’t mean that we need to be relaxed. We need to prepare. It’s clear that the sky is getting darker, the macroeconomic outlook is deteriorating. We need to push the banks to complete the adjustments and prepare for a possible recession.

Banks complain that low profitability is due to the negative rates, but what is their share of responsibility? What are they not doing well to improve profitability?

It is indeed true that the low interest rates are compressing the margins for banks, but the accommodative monetary policy that we have right now is supporting the general economy, the macroeconomic situation. And in a better macroeconomic environment, it’s more likely that borrowers will pay back the loans and it’s also easier to manage the non-performing loan portfolios. You are right that banks also need to focus on improving their own business, improving efficiency. The focus should be on cost reduction and cost efficiency. We also see that the banks which are most effective in restoring profitability are those benefiting from better strategic direction. So they are focusing on their business lines, they’re reshaping their business models in areas where they could become more profitable. In particular, they are investing more in new technologies. These are the areas in which banks should focus their attention to recover profitability.

Could mergers be a solution for the future?

Consolidation in the system could be part of the solution. We still have excess capacity that was built up during the run-up to the crisis and has not been eliminated after the crisis. Consolidation could help banks reduce costs, refocus their business models and, if it is also cross-border, diversify their sources of revenue. This doesn’t mean creating giants in the system. In many cases, it is more in the mid-sized part of the distribution that consolidation is most needed. But also if you compare European banks with US banks, the top layers are not as big so, to some extent, I’d say some consolidation would be a positive way forward.

And focusing on Spanish banks, what are their main strengths and weaknesses?

Spanish banks have significantly improved the quality of their balance sheets. They have sold significant amounts of non-performing loans, so they are much better off right now. This has been massive progress. They are still lagging behind a bit in terms of their level of capital compared with their euro area peers, and they also share the problem of low profitability.

Can you explain how cooperation works between the ECB and the national central banks?

We are a system, a Single Supervisory Mechanism, that includes ECB Banking Supervision and all the national competent authorities, with the Banco de España as one of them. We work together very closely in the Joint Supervisory Teams. Every bank which is under direct ECB supervision, the so-called significant banks, is supervised by a team of supervisors in Frankfurt and in the national capitals. That’s the most important contribution that the national authorities are making. We now have a system which has multiple sets of safeguards comprising the ECB and all the national authorities, and this increases its strength.

How many banks are under ECB supervision and how many will be after Brexit?

Overall, the total number of banks in the euro area is very high: more than 6,000. We make a distinction between what we call the significant institutions, which are directly supervised by the ECB and at the moment number 116, and the less significant institutions, which are supervised by the national authorities in close cooperation with the ECB. Brexit will bring seven more significant institutions under our supervision and 14 additional less significant institutions under the supervision of national authorities. That’s the most up-to-date figure that we have. Approximately €1.3 trillion of assets will be moved to the euro area, so it’s a major challenge for all of us.

Are you worried that Brexit could destabilise European banks?

Brexit is something that worries me as an event in itself. It’s a very sad moment to see one important country like the United Kingdom leaving the European Union. In terms of the stability of the banks, we have done all the possible preparation, both on our side and on the side of the colleagues in the United Kingdom. We asked the banks to prepare and the banks have done all the preparation we asked them to put in place. We did the best we could to prepare and to have all the contingency planning in place. Of course, an event like this is always unpredictable. Especially if it is happening in a hard way, it could lead to market dislocation. We must monitor markets quite carefully, but we did all the possible preparation.

What do you think banks of the future will look like?

That’s a very difficult question! I think new technologies will play a great role in that. New generations are using smartphones much more; they don’t go to branches. And you also see new players entering the market. The payment services industry is already changing a lot because of the decisions taken by policymakers, by legislators in Brussels, for instance, to enhance competition between banks and other types of providers of payment services. This will increase competition and, hopefully, the quality of services for the final users and their user-friendliness, to some extent. That will be an important change.

The other great change I would like to see materialise is greater integration in the market. At the moment, we’re still a market that is very much segmented across national borders. I hope that, at the end of this process, with the deposit guarantee scheme and the like, we will have a much more integrated market where, for instance, you can choose to take your mortgage in Spain from a bank in France or Estonia. That’s not yet easy or possible right now, but I think we will get to that point and that will change the landscape quite a lot.