Interview with El Confidencial
Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Jorge Zuloaga on 16 April and published on 20 April 2020
20 April 2020
First of all, I would like to know how Spanish banks were going into this crisis. Are you concerned that they have the lowest capital ratios in Europe?
In general, euro area banks entered this crisis with much stronger balance sheets, stronger capital positions, better asset quality and stronger liquidity buffers. Profitability was the weak spot. Literally, that was the case all across the euro area. And Spanish banks in particular are not a major exception. It is true that they have somewhat lower capital positions, but they also made significant progress in terms of cleaning up their balance sheets. The non-performing loan ratio in Spain reached, on a consolidated basis, 3.2% at the end of 2019. It was at around 13% in 2013, so the improvement in asset quality had been quite significant. So, all in all, the situation in the Spanish banking sector before the crisis was not that misaligned with the rest of the euro area. The biggest issue was low profitability, cost efficiency – which was still improving – and maybe some need for consolidation. These are also issues for banks around the euro area.
So I understand that banks entered into this crisis well prepared. Is that right?
Especially compared with the global financial crisis, the banks entered this crisis with much stronger balance sheets, much stronger capital positions, better-quality capital, stronger liquidity buffers, more intense supervision, and stronger regulatory frameworks. So the banks were stronger. That’s clear.
Do you think that they were strong enough?
At this moment, there is a lot of uncertainty as to how long this crisis will last and how deep it will be. On the positive side, authorities have taken a strong stance very early. The central bank side of the ECB put in place very significant measures in terms of monetary policy, including significant funding facilities for the banks. We, as supervisors, have provided a lot of relief to the banks, creating capital space for them to absorb losses and continue lending to the economy. Then, on the asset side, governments have put in place moratoriums to freeze the stock of outstanding loans, and public guarantees to ensure that banks could continue lending to the real economy and help small businesses and corporates to stay afloat in this difficult time. These should all help, but, of course, if the recession is deep and long we will see an impact on the banks in terms of asset quality. And the size of this impact is still very difficult to estimate.
What effect are the ECB and government measures having?
The ECB’s measures are already in place. Monetary policy measures are already up and running. Last week there was also a relaxation of the collateral requirements, which has been very helpful for the banks and alleviates the pressure on financial markets. Our measures are in place. We have already created the capital space in terms of releasing the buffers, introducing the new criteria in terms of quality of capital for Pillar 2 requirements, and giving the banks guidance on how they should apply the new IFRS 9 accounting standards in a less procyclical way. Moreover, in terms of our treatment of non-performing loans, we introduced flexibility to allow banks to benefit from guarantees and moratoriums announced by the Member States.
My impression is that the banks in different Member States are now looking into the measures, especially the moratoriums and the guarantees that are provided by the Member States, to see how much they could rely on those to expand their balance sheets.
ECB Banking Supervision is closely monitoring how banks are being affected by this crisis. Have you found any problems, or are they doing a good job?
In the first few weeks the banks’ committed credit facilities have been drawn on to a significant degree. Small businesses and corporates in particular have been drawing on the facilities, and in many cases redepositing the cash in the banks. This has put some pressure, at the beginning, on liquidity and also on capital positions, because the asset side of banks has expanded. The other aspect that has been quite impactful in the first few weeks of the crisis has been the significant downward correction in market valuations. These have been the two major pressure points in the first few weeks, but the situation has now become more relaxed. There has been less pressure on the banks, also as a result of the effects of the monetary policy measures.
How likely is it that this crisis will become a sovereign debt crisis?
As I mentioned before, everything very much depends on the depth and the length of the crisis. But many important measures have been deployed, and some are being discussed at the European level. A truly European response is needed to avoid that a totally exogenous shock coming from a virus morphs into a deeper crisis, especially in some Member States. The measures being taken should provide sufficient safeguards to avoid exactly that.
Do you expect a new round of mergers after this crisis?
The European banking sector was and still is in need of some consolidation. There is still a legacy of excess capacity, inherited from the previous crisis, which has not been completely removed from the system, and this has been a drag on the profitability and cost efficiency of the banks. Consolidation could be part of the solution. The crisis could accelerate the adjustment of those banks that were, in a sense, resisting at the margins of the system; those banks which did not have a viable medium-term business model, but were able to remain afloat thanks to the relatively low interest rates and the availability of cheap funding. These banks, the weakest banks, could come under pressure and consolidation could indeed be part of the solution.
Also in Spain?
I wouldn’t want to comment on individual countries, but I think that's across the board in the whole of the euro area.
How would you assess the relaxation of the banking rules happening right now?
This is a delicate point. We are not actually relaxing the rules, no. We have always been very keen on keeping the measurement of capital, of liquidity, of asset quality, intact. What we have been doing has been to activate the precise provisions that were put in the new regulatory framework that we built after the last crisis, to make sure that banks that have built up buffers in good times can then use them in bad times when there is a moment of stress. That was one of the lessons of the previous crisis, and we are seeing these new rules at work right now. We are not turning back the clock in terms of the rigour of the conservative regulatory framework. We are just applying the regulatory framework by releasing those buffers that were supposed to be used in difficult times, and avoiding the most procyclical elements which are still in the system.
It is important that this point is properly understood. It’s the first time that we are applying these new rules, and it’s important that market participants – and I include not only investors but also market analysts, rating agencies and the like – understand that the buffers are there to be used, and that they do not put any stigma on the banks that actually dip into the buffers, because that would be very negative. We want the banks to use the liquidity buffers. That’s what they are there for. The Basel Committee has been clear that in times of difficulty the liquidity buffers should be used. The same applies to the capital buffers. I really urge all market participants to understand this and play by the rules, and to let the banks actually use these buffers as they’re supposed to.
Do you already know when you will ask banks to return to their previous levels of capital?
We’re not giving very exact guidance at this stage, but the message has been very clear: we will give the banks ample time to go back to the pre-crisis situation. So they will have time for the adjustment, but indeed, there will be a moment – hopefully soon, actually – when this virus will be defeated and the economy will start working normally again. At that time, we will have to decide on the path to return to the normal capital and liquidity levels on a bank-by-bank basis.
Is it possible that some banks will stop paying Tier 1 and Tier 2 coupons?
It is clear that we have put constraints on dividend payments, but we are not planning to put any constraints on payments of additional Tier 1 and Tier 2 coupons. Of course, if banks then begin to use what is called the capital conservation buffer, or the combined buffer – where there is also a countercyclical buffer – when they hit that buffer, then there are legislative requirements to start gradually reducing the payments of additional Tier 1 coupons. But, as I said, banks still have quite a lot of capital space before they get to that point.
So you don’t consider this scenario to be close or real at this moment, right?
It’s not close, no. There are still a lot of buffers that can be used before banks find themselves in that situation.
Some banks – both Spanish and European – like CaixaBank have kept the payment of dividends despite the ECB’s recommendation. Why have you allowed this? Will you take any action?
We have been very clear in our recommendation that we expected all the banks not to pay dividends for both 2019 and 2020. But we are aware that some banks could face legal problems in implementing our recommendation, especially if the general meeting of shareholders had already decided on the payment of the dividends before our recommendation was issued. Those dividends were actually already the property of the shareholders, so in many cases the banks could not claw them back. In those cases we had to accept that the banks paid the dividends. That was a pity, but it is something that legally was not possible otherwise.
All in all, we are pretty pleased with the outcome of our recommendation. Out of €35 billion in dividends that were planned to be paid, €30 billion were not paid. So we managed to preserve €30 billion of capital on the banks’ balance sheets, which is quite a significant achievement, I would say.
Do you have these numbers for Spain?
We don’t break down these figures by country.
Are you monitoring the new guarantees and moratoriums to make sure banks don’t use them to refinance clients with pre-existing troubles?
As you know, we are in a peculiar position as a supervisor. Unlike our colleagues in the United States or in the United Kingdom, we have to deal with 19 different jurisdictions, and 19 different schemes in terms of guarantees and moratoriums. That’s why it would be very difficult for us to monitor each case and this will be done more at the national level. But of course we will monitor the way in which banks use these guarantees, the amount of loans that they grant, and the impact on their balance sheets.
Are you afraid that the coronavirus crisis will make it impossible to complete the banking union?
Many voices always argue that the banking union is not complete, and this is true in the sense that the deposit guarantee scheme is not yet in place, and that there are some elements that are still in the making. But, let me also say that the banking union is alive and kicking; it’s working well. We showed in these circumstances that ECB supervision has been able to react very fast. Our Board, which includes all the heads of banking supervision in the 19 Member States, managed to take very difficult decisions in a very short span of time and by consensus. And in some cases we moved even faster than the authorities in other jurisdictions outside Europe.
So the banking union is working and is delivering what it is expected to deliver. On the completion and deposit guarantee scheme, I trust that this crisis will help us realise that we need to move forward and complete the banking union faster than we previously envisaged.
More than ten years have passed since the beginning of the financial crisis here in Spain, which had an impact on taxpayers and shareholders. How sure are you that this crisis will not provoke new losses for investors and taxpayers?
The work done after the last financial crisis is paying off. The fact that banks are entering this crisis with much stronger capital and liquidity positions and cleaner balance sheets, is a reassurance that they have quite a lot of private resources that can absorb losses before failing. That should provide sufficient reassurance that taxpayers’ money can now count on a much stronger protection from private resources. But as I said, it is very difficult at this stage to predict the volume of losses and the likely impact on banks’ capital.
The Spanish Deputy Prime Minister has expressed his intention to nationalise companies during the coronavirus crisis. What would the ECB do if there is an attempt to make Bankia a 100% publicly owned bank?
I won’t comment on the specific situation of Bankia or any other bank. I notice that there are a number of countries where measures are being announced or taken to protect against private investors taking over specific firms, which is somewhat understandable because of the very depressed stock market valuations at the moment.
But at the same time, from our perspective as banking supervisors, if there is any investor, be it private or public, that at this moment wants to put equity into the banking sector with a good business plan, then that would be viewed purely on technical grounds. We should be neutral, technical and open to an investment in the banking sector at this moment. So I understand there are sometimes concerns, but I think that we should be open to any equity investors that want to invest in banks at this juncture.
So you’re not in favour of the “golden share” [veto against some investors] announced in Spain and other countries?
These are political decisions. It’s not up to me to decide. What I am saying is that from the supervisory point of view, if there are equity investors that want to put money into the banks, we will look only at the solidity and the quality of their business plans for the banks. That’s our attitude.
Is the exposure of some European and Spanish banks to emerging markets like Mexico, Brazil or Turkey an advantage or a potential additional problem?
Diversification of risks across geographies is an element of strength for the banks. However, looking at the IMF forecasts, and differently even from the 2008 financial crisis, this is the first time in which we are going to see a synchronised recession across the globe. Nine out of ten countries are now projecting a recession in 2020. So I think that these diversification benefits will probably not be as useful in this crisis as they’ve been in the past.
The coronavirus has proven that the banks can operate almost completely normally without using the physical branches. Do you think this is an incentive to speed up spending cuts in the future?
There are some positive lessons and some negative lessons on which we will need to reflect carefully. The positive lesson is that probably a larger portion of customers will now be more willing to use digital tools, and this could accelerate the digital transformation of banking. Spanish banks have invested quite a lot in this area.
This could lead to an important transformation that we were advocating. We said even before the crisis that the banks that had been investing more in IT, using digital channels and reducing costs in their branch networks, are the banks which have increased their profitability. So that was an important element. It remains so, and it is possible that this transformation will accelerate.
On the negative side, for instance, we have to think about some aspects which are emerging. For instance, the exposure to cyber-risk, which is somewhat on the rise, and the delicate issues connected to outsourcing. A lot of bank functions were outsourced, sometimes to emerging markets, like India for instance, where teleworking facilities have not been as effective as they have been in Europe, for instance. So I think there will be a positive development in terms of the digital transformation, but there are also some pressure points in terms of IT security and outsourcing of functions to remote countries that might need to be reconsidered.
Banks were getting close to their NPL targets, but now, with the crisis, they will see new volumes of NPLs. How demanding is ECB Banking Supervision going to be with banks so that they reduce their NPL levels?
To be honest we were pretty pleased with the progress made in the last two, three years, since the ECB issued its own policy on NPLs. We set the targets that were agreed with the banks and most of them met those targets, with many banks actually overachieving them. Progress has been very good. I don’t yet have the end-2019 data, which will come in a few weeks, but I am sure that we will see this confirmed. Of course, we understand that in the new market situation it will be difficult for the banks to continue with progress at the same pace. It will be difficult to securitise or sell loans when the markets are at the moment shut down for these types of risky assets. So it’s clear that we will redefine targets with the banks, and we’ll give them more time, if it is needed, but of course we will maintain in the medium term the pressure on banks to continue the process that has been brought forward so successfully so far.
How do you think the banks’ reputations will emerge from this crisis?
This is not a crisis that has been triggered by misbehaviour on the side of banks at all, so the banks are not the culprits this time, as they were in the previous crisis. Actually this time they can also be part of the solution, instead of part of the problem. They can repair their reputations by assisting their customers and helping them crossing the desert, as the restrictive measures taken to stop the virus make it impossible for corporates or small businesses to work as usual. Banks could also use this opportunity to repair their reputations and show that they are there to assist their customers and to help the economy through these difficult times.
Will you remind banks of this crisis next time they complain about how tough the ECB is?
Well, I think we have been a tough supervisor, we still are a tough supervisor, and we will return to being a tough supervisor. But we are a supervisor that understands the difficult situation in the banking sector, and that has shown the flexibility that is necessary in a moment of need.
Are you more concerned about Italian and Spanish banks than the banks of other countries?
At the moment there is no evidence of any country-specific impact on the banks due to the crisis. We know, of course, the impact of the COVID-19 has been harsher for the moment in Italy and Spain, but the social distancing measures, which are those that affect the economy, have been adopted in a very similar fashion across the board throughout the European Union. So it’s very difficult to say whether there will be specific differences in the way in which the crisis will impact the banks across the banking union.
Are you making any specific recommendations to the banks regarding the exposure to sovereign debt or are you at all worried about that?
Not specifically. In general we pay attention, of course, especially to concentration risk that banks might have in sovereign portfolios. We look carefully at the potential impact of movements in spreads on the banks’ capital. That’s something we monitor as a normal part of our supervisory tasks. We did it in the past, and we keep doing it now.
Do you see any special impact on the capital derived from an increase of risk-weighted assets and new NPLs?
This is precisely the reason why we opened the capital space of the balance sheet, by releasing the buffers or asking banks not to pay dividends. We expect banks to experience an increase in risk-weighted assets that will be driven both by the need to increase lending to support their customers and by the increase in the riskiness of their portfolios. Of course, we would like to also see how much the public guarantees that have been deployed will help to contain this effect. That will also be a moderating factor.
What do you expect to see in the banks’ Q1 results?
We are collecting information right now on the end of Q1. We have seen the publications from the US banks in the last couple of days, which have shown a significant increase in the cost of risk in the United States. That’s an area we will look at with great care as soon as the banks publish their results.
Do you think European banks will follow this example?
I hope the European banks are not experiencing such large losses. What is shown in the American example, which I hope will be the case also in the European example, is that even in the light of relatively large losses, banks do have significant capital space still to absorb those losses. So for the time being, that’s the positive piece of news that we are seeing.