Interview with the Financial Times

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Martin Arnold on 30 March and published on 31 March 2020

31 March 2020

Thank you very much for making time. It’s great to have the chance to ask you the questions that I think a lot of people are asking after your announcement on dividends. So, the request for banks to stop paying dividends is the latest move by regulators to get banks to conserve capital, or increase the capital resources they have. Regulators have been giving banks quite a bit of relief in various ways, right?

Indeed, the main objective of our recommendation not to pay dividends published on 27 March is capital conservation. We need banks to keep capital resources within the banking system in order to boost their capacity to absorb losses and to support lending to families and corporates during the coronavirus (COVID-19) pandemic. Conserving this capital will allow banks to reap the full benefit of the temporary relief measures announced by ECB Banking Supervision over the past three weeks, on which I elaborated in a blog post published last Friday.

I would also like to highlight that there is a strong coordination between the monetary policy measures, which have created the lending facilities to support banks’ liquidity and lending, the relief provided by regulators, and the fiscal measures which are being designed by Member States to provide guarantees to lending. So the three elements work very well together.

What are you expecting from banks? Clearly you are worried about the risk of a credit crisis – a credit crunch – and of credit drying up, in turn causing greater damage to the economy. Is that why you are taking all these measures: to give banks more leeway, particularly on their capital buffers?

Well, rather than anticipating a credit crunch, we are simply aware that the extraordinary measures which have been imposed by governments to fight this pandemic will basically ratchet up the demand for credit, because corporates, firms and households will, in many cases, need banks’ support. If banks are not equipped to meet this demand, then some perfectly viable businesses will default, which will greatly damage our economies in the long term. Capital is conserved and buffers are released to increase the firepower of banks to provide lending to households and businesses. That is the main objective [of our measures].

What we are seeing now is that small and medium-sized enterprises and corporates are drawing on credit lines. There is a clear indicator that the demand for credit is increasing.

So your measures are aimed at allowing banks to cope with that extra demand for credit. How much do you think you would like to see banks using forbearance and giving customers the ability to delay payments? How do you encourage banks to give their customers more breathing room when they’ve been hit by this shock on their loan repayment?

Of course we want the banks to continue screening and monitoring customers. First of all, they need to be able to continue monitoring their customers’ credit quality. And they need to understand the peculiar nature of the situation. If Member States introduce a moratorium – if the whole economy has to play along – it is only reasonable that banks put these loans into a freeze rather than asking for [principal and interest] payments immediately. It is a thin line. We want the classifications to be maintained: when a loan is non-performing, it has to be recorded as non-performing. What we are trying to do is to mute the impact on the banks’ balance sheets and their capital, to some extent, or alleviate the impact this is having on banks’ capital and ideally also on the profit and loss through accounting provisions.

You have allowed banks some flexibility on the IFRS 9 accounting treatment, particularly the procyclical element, where they have to build up provisions in anticipation of defaults, correct?

On accounting, there have been various calls ranging from changing the definition of non-performing loans to even suspending the application of IFRS 9. I think we would send misleading messages if we were to temper the measurement of asset quality at this difficult time. We would risk the market no longer believing the information that banks publish. In our view, that would be very damaging. However, within the framework we have, there are some margins of flexibility that supervisors can, and should, concede. At this point, we think it is fair to do so. On IFRS 9, for instance, we are not telling banks not to apply IFRS 9, which has been an advance on previous accounting standards. What we are saying is that there is nothing laid down in IFRS 9 that forces banks – when they have a sharp hit followed by an expected rebound in a relatively short period of time – to project these heavy losses for the lifetime of all the loans. That’s not written anywhere. The International Accounting Standards Board and ESMA have provided guidance along exactly the same lines. So we are giving banks guidance within the framework of the current accounting standards to avoid excessive procyclicality when applying those standards.

You talked about dividends. What about coupons on Additional Tier 1 instruments, which can be questioned if banks fall below certain buffers? And what about bonuses? The 2019 bonuses have mostly been paid out by now, but we are seeing some banks, like BBVA, whose management team waived their bonuses for this year. Would you like to see more banks do that? What are you doing on variable remuneration? Are you leaning on banks to be very conservative in terms of how much variable remuneration they pay out?

Payments on Additional Tier 1 and Tier 2 instruments are standard payments on debt and hybrid instruments as they come due. In my view, suspension of these payments should be triggered only if and when the maximum distributable amount, the triggers set in the European legislation, are hit. So we have no plans to take any action on Additional Tier 1 and Tier 2 payments.

As far as bonuses are concerned, there have been massive changes to the whole remuneration framework, moving more to payments in instruments and in the longer term, with deferrals over several years, clawbacks and the like. So there have been some important structural changes that make the issue less of a problem than it was in the previous crisis. In the capital conservation mentality that we are trying to instil in banks, I think we will expect them to exercise extreme moderation on variable remuneration.

Is that something you’re encouraging banks to do?

At the moment, we are focused on the dividend payments because of the sheer urgency as we find ourselves in the season of dividend payments and Annual General Meetings (AGMs). I would really hope that supervisors don’t need to intervene on each and every choice made by the banks. I hope that sometimes banks themselves could also exercise this sort of moderation.

Yes, but sometimes it’s easier for banks if they’re forced by the regulator to do something. Otherwise they fear that, in the case of dividends, their shareholders, and in the case of bonuses their employees, might be rather upset! It’s easier to have a scapegoat like you, Andrea, to blame it on!

Well, what can I say? If we have to play this role, so be it!

Are you doing stress tests in terms of COVID-19? And if so, is this sector by sector? We hear that you’re running an exercise so that the banks can look at where their vulnerabilities might lie. Can you talk about that?

Well, of course, as you know, we postponed the stress test because we had an actual stress situation under way. We thought it would not be very mindful of us to devote time and resources to simulating a situation when we have a real issue to deal with. Especially at the moment, our supervisors are in very regular contact with the banks and gathering information from them. For the moment, this is the main activity. However, in the future we will probably try to give a little more structure to our assessment of the situation and where it could lead.

Going back to some of your earlier comments, you seem to be keen to say: look, we’ve got all these buffers and we are providing as much flexibility as we can. The banks have been pushing pretty hard, for example, for the completion of Basel III to be postponed. They have been asking for a lot of these things. Are you keen that this doesn’t become a permanent rolling back of the safeguards that were put in place after the last financial crisis?

I think that postponing the implementation of Basel III is a postponement in the timeline, but not in the substance. It’s clear that we are all committed to getting to the finishing line of this reform. The only point is that now both supervisors and banks have, let’s say, other issues to grapple with. So it would be inappropriate now to start focusing our attention on that. Also, I would say that what we have done is very consistent with the construction of the regulation. The post-financial crisis regulatory framework has a set of higher, more demanding minimal requirements to be respected at all times. On top of that, you have a set of buffers that are supposed to be used to continue financing the economy when a crisis materialises. I don’t think that has been fully grasped yet. In the markets, if a bank is using its buffers this is something that is seen as negative – I think markets should accommodate that as something normal in a crisis. It is exactly how the new regulatory system is expected to play out.

For instance, we were discussing the drawing of liquidity lines. This, of course, has the immediate effect of increasing risk-weighted assets and reducing the liquidity position of the banks. So if this were to be seen as a negative development, banks would have every incentive to try to prevent it. This would result in corporates lacking financial oxygen at an important time in this crisis. I think that everybody should play along and understand that this is the moment at which, in line with the construction we built up after the last crisis, the buffers need to be used. Actually, they need to be put to good use.

Credit lines are there to be drawn and banks need to provide that extra credit. What are you seeing so far from banks? Are they responding in a way that you would like them to? Or is there some behaviour that is concerning you?

At the moment I am fairly pleased with the way in which the banking sector is reacting. First of all, we started this time with much higher levels of capital and liquidity buffers, which means that we have some degree of comfort in terms of enabling this support to the economy. So far, so good, but of course we are at the very beginning of what is likely to be a very difficult recession ahead of us. We need to be prepared and in no way should we be relaxed. That’s also why capital conservation at this stage is a very important element for us.

We talked a lot about capital and how it’s likely to be used by the banks. What about liquidity? Is liquidity as big, or even a bigger concern for you as this crisis develops? Do you worry about banks getting hit by liquidity issues rather than capital issues?

We are closely monitoring the liquidity position of banks. As I said before, they are starting from a very comfortable position on average, and also individually. That’s of course something to be looked at. If customers draw on credit lines, this immediately hits the liquidity position of a bank. We are seeing this and it’s nothing to be worried about. We said this in our 12 March press release – that we are also ready to accommodate reductions in the liquidity coverage ratios to below 100%. Again, that ratio is also a stressed metric which is supposed to be used in times of crisis. We also have an extremely accommodative monetary policy framework that is providing quite a significant source of funding for banks. That’s not to say that I have no worries on the liquidity side, but we are at a point in time where some use of the liquidity buffers is still a positive development.

Would it not be a concern to you if banks go below the 100% liquidity coverage ratio and they start to liquidate some of the liquid assets that they’ve built up?

Of course, there would be a point at which we would start monitoring the situation with closer attention. However, we would not ask for remediation plans immediately after the 100% liquidity requirement is hit. We will accommodate some use of the buffers, in line with the international standards, by the way. The Basel Committee has given very clear guidance along the same lines.

Do you think that regulatory relief has reached its limits? Or could you still go further?

We have done a lot. I think we have created a lot of space and we have shown that we are flexible and pragmatic. We will move according to the circumstances. At the moment, I am happy where we are in terms of having provided quite a significant amount of space for the banks to fulfil their key function.

But are you prepared to continue showing flexibility and pragmatism as things develop?

In such an extraordinary situation – anything I say now, I risk saying something completely different a few months down the line. What is happening right now is so unpredictable. We need to closely follow the situation and be ready to deal with the challenges as they present themselves. I think we are moving faster, we have tried to be ahead of the curve and I think that the space we have created is very substantial. I hope that there is no need to do anything further.

It’s a shame that we hadn’t completed the banking union when this crisis hit. In a way, the banking union is still only partially complete. That leaves Europe a little bit more exposed than it could have been.

There is one thing I would like to say about this: sometimes there is this impression that the banking union is a sort of chimera, to be reached in the distant future. But a strong part of the banking union is already here and functioning. We are working together and the cohesion shown by the Supervisory Board in moving fast at this stage of the crisis is something very positive. The fact that the Supervisory Board members have been so united and strong in terms of enacting these measures is a very positive signal for the functioning of the banking union.