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Interview with Süddeutsche Zeitung

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Meike Schreiber und Markus Zydra on 4 and published on 19 February 2020 (part 2)

19 February 2020

Part 1 (published on 17 February 2020)

In the end, though, it was once again down to the taxpayer to bail out Carige and, here in Germany, NordLB in Hannover. Wouldn’t it have been a good signal for bondholders of both of these banks if they’d lost their money when the banks were resolved?

Look, the idea that shareholders and bondholders have to pay when a bank goes bankrupt is pretty clear by now. At the time of the financial crisis it was different – investors who held subordinated bonds of the banks were able not to lose a single cent, while governments had to bail the banks out to the point of putting their own solvency at risk. That happened in Ireland, for instance. It would not happen now, at least not to that extent, and that is a good thing.

But there are still legal loopholes in the EU which mean that the taxpayer is still liable.

After the crisis, the message that was sent to the general public was that no taxpayer would be liable for the banks anymore. But the legal framework is more complex. Especially, there are still very different rules that apply in the different countries when a bank goes into a crisis.

What do you think about that?

I do not like it. I would like to have a more harmonised framework. For instance, there are major differences in the way deposit guarantee schemes can intervene to support banks – these are rules member states make themselves. This conveys the impression that the European crisis management framework is not delivering common outcomes, that investors are treated differently across member states.

That is true, but the European Commission gave the green light to saving NordLB and, astonishingly, said that it happened under market conditions. And then the ECB and BaFin claimed that the bank had a viable business model. For many people, this did not make sense.

European authorities are often characterised as distant bureaucracies. But the reality is that we have to do our best to treat all banks across the Union in an equal and fair way. The European Commission has its own standard procedures for assessing if a bank has received State aid. The ECB looks at the stability of the bank and assesses whether a business plan complies with the regulatory requirements.

What that decision ultimately means, though, is that bondholders can again be certain that the taxpayer, or the public sector owner, will bail them out if things go wrong. They get a return on their investment but take no risk.

This is not the signal that the cases of NordLB and Carige are supposed to send. By the way, some holders of subordinate bonds in the latter had to bear significant losses. It is clear that we need to harmonise national rules as a matter of urgency. We should be able to resolve banks in the same manner wherever they are, and to use national guarantee systems consistently.

We have noticed that the new European Directive CRD 5 is lowering the quality of capital that banks need to hold to cover their risks. Is this the turning point to looser banking regulation?

Indeed, the CRD 5 introduces a change in the quality of the capital required by the supervisor to cover for the bank’s individual risks (so-called Pillar 2 capital requirement). We would have preferred that our requirements were fulfilled with common equity, the capital of the highest quality, which can be used to absorb losses also before a bank enters into resolution. However, this is the decision of the legislator and of course we will abide by it.

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