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Interview with ERT

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Rallou Alexopoulou on 12 May 2022

12 May 2022

During the pandemic you took some initiatives that really helped banks and supported lending to the economy. What should we expect from ECB Banking Supervision as a response to the ongoing war in Ukraine? And could you recommend that banks restrict their dividends?

The war in Ukraine is first and foremost a human tragedy, but there will be economic repercussions and these will affect the banks. Banks are now in a very strong position to confront this shock. They don’t have high exposures towards Russia, towards Ukraine, towards Belarus. So the key issue will be the impact of the deterioration of the macroeconomic outlook. We are in a different place than we were in 2020 when the pandemic started. There, we were facing the potentially harshest recession in peacetime Europe. Now we are confronted with a slowdown in growth and an increase in inflation, so the situation is different. We don’t think at this moment that there will be a need for relief measures. And we are not planning any “one-size-fits-all” restriction of dividends. Of course, we will discuss with each and every bank their capital trajectory and their plans to pay dividends.

How does the war affect your supervisory priorities and would you consider revising them?

Well, there is not a lot of need to revise them, actually – they are still very relevant. We were very focused on credit risk, and credit risk remains the major area of attention for banks. Maybe we had a shift in the sectors which are most affected, more the services sector during the pandemic, and now maybe more the energy-intensive sectors like manufacturing, and the parties that are going to be affected by increasing interest rates, like real estate. Still, credit risk is very relevant. We were also very focused on IT and cyber risk, on climate risk. As you can imagine, these are becoming more and more topical right now as a result of the war and the impact on energy prices.

Do you see a risk of increased new non-performing loans (NPLs) for the European and the Greek banks, given the fact that price increases affect the disposable income of households and the costs for some enterprises? What could governments do to help?

You’re right – the increase in inflation of course has an impact on the ability of borrowers to repay their loans, especially if there is an increase in interest rates. But we are doing some analysis and, in general, an increase in interest rates and higher inflation rates is positive for bank profitability and could be a bit negative on the asset quality side, as you correctly mention. So the net effect will be different across banks. And we will have to check what the effect will be bank by bank. We have to say that we are also in a much stronger place. We have strengthened the internal controls of banks a lot. And we have better policies and better practices to deal with non-performing loans.

In terms of governments – we have seen during the pandemic that the strong fiscal support that governments provided to households and most businesses and corporates was essential to reduce the impact on banks. So the fiscal support and the stance of governments, will be crucial for determining the effects on banks’ asset quality.

Last question: what do you believe that Greek banks should focus on now? What should their priorities be? What would you, as a supervisor, like to see them doing?

First I need to congratulate, honestly, the Greek banks for the progress they have made in the last few years. They started from a very difficult situation in terms of non-performing loans. The progress which has been made is very impressive. I was concerned, I have to be honest, when the pandemic started that this progress would have been interrupted, but instead it continued. This is very positive. It is a collective result. The praise goes to the banks, to the Greek government as well – because it put in place mechanisms like the Hercules Asset Protection Scheme to support the cleaning up of banks’ balance sheets – and maybe also to our supervisory teams from the Bank of Greece and the ECB who struck the right balance between supervisory pressure and flexibility. Greek banks need to continue focusing on this issue, of course. They are seeing the finish line now, they are close to reaching the same level as their European peers, but they need to continue.

There needs to be a focus on the operationalisation of the sale-and-leaseback plan. The Hercules Asset Protection Scheme needs to continue delivering results. There is also the modernisation of court processes, which is becoming urgent. This would lead to a turning of the page in terms of non-performing loans. Then they will have to focus on the issues that all other banks across Europe are focusing on, in particular generating profits, refocusing the business model, digitalisation, investing in digital. And these will be the challenges that they will face next, in order to have strong capital generation going forward.

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