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Interview with ERT

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by George Syriopoulos on 24 November 2020 and broadcast on 28 November 2020

28 November 2020

What is the progress regarding the banking union so far and what will change if and when it is completed? What’s the situation of European banks?

European banks nowadays are in a significantly better position than they were before the previous global financial crisis. This is an achievement of the banking union to some extent; of the pressure that we put on the banks to strengthen their balance sheets. This means that banks are now able to absorb a significant amount of losses and continue supporting households, small businesses and corporates. Of course, we are in a very uncertain situation and so we need to be very cautious as to the future development of the banking sector, but there has been important progress.

However, the banking union is still an incomplete construct and we need further efforts to achieve a truly integrated system and to withstand system-wide shocks. In particular, what is missing is the third leg – the European deposit insurance scheme – which is key to the safety of the whole banking sector. We also saw this in Greece in the last crisis: when there is a perception that the degree of protection for depositors is not the same across the European Union, they have an incentive to move their money abroad when there is a crisis. This could exacerbate the financial instability. Also, in the absence of common deposit protection, the market remains segmented along national lines. This is also not enabling us to reap the benefits of the banking union.

You have proposed the creation of a bad bank in order to deal with the issue of non-performing loans. How receptive is the banking market to this, and what could be the risks if a bad bank is not established? What would you say to those who oppose this idea?

The macroeconomic outlook is still very uncertain, so we cannot yet rule out the possibility that the recovery from the hit, the shock, of the pandemic will be slower than we had hoped for and that there will be a significant build-up of bad loans going forward. I hope that this scenario does not materialise, but we should be prepared, I think. The lesson of the last crisis is that if we are not fast in cleaning the banks’ balance sheets, they will not be able to support a faster recovery and help our economies bounce back to pre-crisis levels. In general, asset management companies are tools which, in the past, have been able to free banks’ balance sheets from bad loans and enabled them to support households, small businesses and corporates. I’m convinced that such an initiative should be coordinated at the European level to be effective, because otherwise there is a risk that banks in one country could benefit from better conditions than banks in another country. This would be against the principles of the banking union.

So there is a need, in my view, for a European initiative in this area, also to drive a coordinated reorganisation of the banking sector if there were to be problems going forward. The idea met with objections from two different points of view. On the banking side, the industry thinks that I am too pessimistic, and they have a rosier picture of the future. I hope they are right, honestly, but I still think that while we hope for the best, we should also prepare for the worst. And on the side of governments, there is a concern that this might be an initiative that could lead to some sort of mutualisation of losses – that one government might need to pay for losses generated by banks in another Member State. I think that, as this shock is not due to any misbehaviour by banks, it would be coherent to have a common European response and to also have some sort of loss-sharing. But if there is not the political will for this, we can avoid it. We can have a mechanism that allocates losses to the Member States where the banks are located and still benefit from a common European initiative. I think it is important to start thinking about that.

How resilient would you say the Greek banking system is today? Is it able to support the economy with new loans? Are the necessary conditions in place?

The Greek banking sector has made incredible efforts and progress in addressing the main issue, which is the legacy of non-performing loans from the past crisis. We have seen a decrease in non-performing loans of around €25 billion from December 2018 to the third quarter of this year. So there has been an important effort, but the ratio of non-performing loans to total loans remains much higher than in the rest of the banking union. It is 36.7% in Greece, compared with below 3% in the euro area as a whole, which means that additional efforts need to be made. Banks are aware of that, and with COVID-19 possibly driving a further deterioration of asset quality going forward these efforts are now more necessary than before.

The government has put in place the Hercules Asset Protection Scheme that enables banks to securitise, to free their balance sheets from non-performing loans. This has allowed a significant reduction of the non-performing loans in recent times, so a lot has been achieved already. What has been planned under this programme needs to be executed. Banks have to seriously consider, in my view, further accelerating the clean-up of their balance sheets. This is not the time to wait and see. We know that the heavy recession triggered by COVID-19 will lead to a further deterioration of asset quality and these banks need to still be able to support the economy. They need to treat this issue as a matter of urgency.

There is also something that the authorities can do to support this process. There are important reforms which are now being discussed, I understand, in the Greek Parliament and within the Government. Reforms such as the implementation of the new insolvency code, the strengthening of the e-auctions framework for non-performing loans and eliminating the backlog of personal insolvency cases which are pending before the courts. All these issues need to be resolved to enable the banking sector to become more viable and really be able to support the economy.

Some believe that, after Brexit, Great Britain will have so much banking autonomy that it could attract deposits and capital and provide banking services without the controls that exist in the euro area. Are you concerned about unfair competition from the UK banking system? How about regulatory competition within the European Union?

The future of the United Kingdom’s relationship with the EU in the area of financial services will be based on the framework of equivalence, which has already been adopted for a number of other non-EU countries. The basic concept of equivalence is that if the regulatory and supervisory framework of a non-EU country is sufficiently similar to that of the EU, you might enable firms from that country to provide services to European customers in a relatively easy and smooth way. The EU, also in the case of the United Kingdom, will adopt equivalence decisions on a case-by-case basis and will be able to change them if the United Kingdom departs significantly from the EU regulatory framework, as would be the case if any other non-EU country did so. This means that the possibility to use the regulatory and supervisory framework to make firms outside the Union more competitive is not really an option.

It is also important to note, though, that not all services are subject to equivalence. Especially for core banking services like deposit-taking or lending, there isn’t an equivalence framework. Actually, the passporting right that UK firms have now, which allows them to directly provide services to European citizens, will not be there any more after Brexit. So banks from the United Kingdom, and also subsidiaries of US banks that were serving European customers from the United Kingdom, have had to relocate their business to the EU. Many of these banks are now under the direct supervision of the ECB. We agreed target operating models with them concerning how they should work within the EU, and they are moving quickly towards implementing those models.

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