Interview with De Tijd and L’Echo

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Pieter Suy and Olivier Samois

5 November 2020

Prior to this interview, you had meetings with the National Bank of Belgium and the Belgian banks. Did the new wave of the coronavirus (COVID-19) pandemic prompt you to schedule these meetings?

No. Every year I visit the countries in the European banking union to talk with the local supervisors, and in most cases also the banks. Last week I had a meeting with the management and supervisory staff of the Nationale Bank van België/Banque Nationale de Belgique, and the Belgian Financial Sector Federation (Febelfin) and the Belgian banks. So this was not coronavirus-related, aside from the fact that everything was virtual. Otherwise I would have had a pleasant lunch with the Governor, there would have been more personal interaction with the people I met.

Europe has entered a new phase of the coronavirus crisis. How will banks react to this?

We have to keep in mind that this is an extraordinary shock to the financial sector and the broader economy, not a crisis triggered by banks misbehaving. At the start, we focused on banks’ capacity to keep lending to households and businesses. And that’s what happened, in part because the ECB and national governments put in place relief measures for them. Banks did not tighten their lending, as happened in the past.

The key issue now is what will happen next. Credit risk is very high and there will be a deterioration in banks’ asset quality. It would be surprising to see anything else, having been through the harshest recession on record. But we can’t foresee when this deterioration will appear in bank balance sheets and how deep the problem will be. We need to brace for the impact and do our best to steer the system through this difficult period.

How vulnerable are banks at this stage?

The central economic scenario in July was that we would most likely see a significant recession in 2020, followed by a rather sharp rebound that would bring euro area GDP back to 2019 levels by the end of 2022. In that scenario, the banking sector would see some deterioration of its capital position. But it would be manageable, as European banks entered this crisis with a much stronger capital position and improved asset quality.

But in a second wave with a more sluggish recovery, the impact on capital and the deterioration of asset quality could become much more significant. We are still uncertain what course the economy will take in the coming months. Banks can hope for the best, but should prepare for the worst.

And are they prepared enough?

In July, banks were already warned that they should prepare for a significant increase in non-performing loans (NPLs). We are also pushing them to be very proactive in managing customers. Some of them will see temporary difficulties but are more likely to survive this crisis, while others are not in good shape and will not come out of this.

Banks are at a critical juncture. If they take early action, by restructuring loans and putting customers back in a position where they are able to pay, then they can avoid a significant rise in NPLs at the end of the moratoria.

Banks were advised to postpone their dividend payments and share buybacks. But HSBC and Santander are already hinting that they want to resume their dividend payments.

We are in “wait and see” mode. We have not taken any decision in that respect. We will wait until 10 December, when the ECB will publish its macroeconomic projections. We want to see how this second wave and new government measures will affect our estimates.

But of course they’re putting pressure on us. That has not escaped my attention [laughs]. We will do what is in the best interest of the sector.

In an op-ed in the Financial Times you recently discussed the concept of a European asset management company, a so-called bad bank, that could take on a large part of those NPLs. Does that not shift the problem from the banking sector to the public sector and keep unhealthy banks alive?

It’s not a proposal to help banks that misbehaved. The point is that we are in an unprecedented crisis that will leave some debris on bank balance sheets. If our worst estimates come true, banks will have a significant amount of NPLs on their books. That could mean that, in some cases, they won’t be able to lend and support the recovery of the economy. At the same time, you have corporates and small and medium-sized enterprises that are loaded with debt. They won’t be in a position to invest in new initiatives and will devote all their efforts to paying back their debt. The idea of an asset management company is to take those NPLs and move them somewhere else.

Would it support zombie banks? No, not so long as we have strong conditionality. That is also why it is so important that this would be a European initiative, with exactly the same criteria across borders in the European banking union.

Do you think we will see a big consolidation in the European banking industry very soon?

The European banking industry entered this crisis in a state of structural fragility: excess capacity, no consolidation after the last crisis, relatively poor cost efficiency, many banks that didn’t invest enough in new technologies. Consolidation is one of the tools that can help banks focus on addressing these issues. Some banks have taken the initiative, like Intesa and Ubi in Italy or CaixaBank and Bankia in Spain, and this has prompted new discussions within the boards of other banks.

What is the situation of the Belgian banks at this point of the crisis?

The restructuring of the Belgian banking sector since the last crisis has been more extensive than in other countries. Belgian banks now have capital positions that are stronger than the European average and they are also a bit more profitable than the European average.

All in all, and I’m no longer specifically talking about Belgian banks, we are at a juncture where it is very difficult to identify the risks. Banks’ exposure to vulnerable sectors will be a substantial driver of developments over the coming months. That could become an issue, even for banks that today look pretty healthy.