Interview with Expansión
Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Nicolás Menéndez Sarriés and Andrés Stumpf on 1 June 2022
8 June 2022
Spanish banks’ capital is lower than the eurozone average. Does that worry you?
European banks have strengthened their capital position. This was even the case during the pandemic, when they reached the highest levels of financial resilience since the start of the Banking Union. This applies to Spain too – the current position of Spanish banks is fairly robust.
The ECB has put significant pressure on banks to dispense with the typically Spanish role of the executive chairman.
It is true that the role of executive chair is more prevalent in Spain than in other countries, as it is historically entrenched. It is also true that the ECB has expressed some concerns on issues that could emerge with this model of governance in terms of excessive concentration of power, no clear separation of roles between the executive chair and the CEO and insufficient ability of the board to challenge critical decisions of a bank’s executives.
Having said that, I also want to acknowledge that Spanish banks have responded well to the concerns we have raised, and have largely fixed the issues we have identified. Many banks have either committed to phasing out this model of governance, or have introduced changes to address these issues. I am pleased with the progress made, and I am comfortable with current governance arrangements I see in Spanish banks.
Why does it bother the ECB so much if a bank’s responsibilities are concentrated in one person?
You need to have checks and balances in any organisation, but especially in a bank, which manages “other people’s money”, to quote the famous book of Louis Brandeis in the early 19th century. Even the most capable director can at some point make mistakes or take excessive risks. You need robust governance that enables to take different perspectives into account.
Would the ECB force the executive chair or CEO to step down if they were subject to allegations of misconduct?
It is extremely important for us – and for the banks – to ensure that senior management are unsullied by allegations and by serious concerns about their reputation and ability to perform their role properly. Of course, we are not prosecutors or judges, and we are naturally always respectful of due legal process, but we have to look at the whole picture, and the possible impact on the prudential position of the bank. If we find there are strong grounds for us to take action, then we have the tools to deal with the situation. We have already done so in several cases, for instance, at banks where executives have been responsible for breaching anti-money laundering rules, or sleeping at the wheel.
Where do you draw the line?
Every case is different and must be looked at on a stand-alone basis. We cannot take any drastic action just because a banker is implicated in a preliminary investigation, but we also cannot wait until a final guilty verdict is announced before we intervene. We need to make our own assessment of the situation, check whether there are reputational risks for the bank and whether the executive is still able to perform his or her duties before taking any decision.
The ECB decides who is fit for the board, if dividends can be distributed, if the business model is sustainable...what is left for the bank to decide?
I can assure you that we don't want to call all the shots, or overstretch our mandate as prudential supervisor. It is up to the bank to decide who runs it, how they want to remunerate shareholders, and what business model they want to follow. We only intervene if the soundness of the bank is at risk.
There has been another round of consolidation in the Spanish banking sector. How do you see it?
I think the consolidation process has generally been positive in terms of efficiency and profitability. It has allowed banks to refresh their strategies and refocus their business models. The market response has also been positive.
Do you think that greater consolidation and the subsequent closure of branches could leave certain sections of society in a vulnerable position?
I don't see any contradictions between improving cost efficiency by closing branches and enhancing digitalization while also continuing to provide good services to customers with lower digital literacy levels. During the pandemic we saw that a significant portion of the banks' customer base easily switched to digital banking. This frees up the resources for banks to help those customers who are less tech-savvy. Branches still play a key role in meeting customers’ needs and will continue to do so for a long time. However, there is still scope in Spain to reduce the number of branches without harming any customers. The numbers bear this out: in Europe there is an average of 20.9 branches for every 100,000 people, while in Spain you have 45.5 branches for every 100,000 inhabitants.
Will we ever see consolidation on a pan-European scale?
Under the current market conditions, the main driver for mergers is to generate cost efficiency. So it is quite natural that to some extent the first wave of mergers was focused on areas with overlapping national distribution networks, because that is where you can achieve the most cost savings. When the interest rate environment changes and we manage to make even more progress towards completing the Banking Union, removing obstacles to cross-border banking, then I think the case for pan-European mergers will also become stronger.
Are you concerned about the impact of the current macroeconomic conditions on banks?
Looking at the European Commission's projections from a few weeks ago [the ECB will publish its own updated projections this week], I see that GDP growth is expected to be lower this year than was anticipated before, which is of course not good news. But baseline growth is still supposed to be positive, above 2% in the euro area both in 2022 and in 2023. Regarding the expected normalisation of the ECB’s monetary policy, I think the banks will benefit from the positive effects on their interest rate margins.
At this stage I am not excessively concerned, but the current scenario is in any case one of high uncertainty. We can’t exclude that the outlook worsens. That's why we are pushing banks to also develop capital plans for more adverse scenarios.
The Russia-Ukraine war is one of the focal points of this uncertainty. Do you think the sector is at greater risk of cyberattacks as a result of the conflict?
We have been concerned about cyberattacks for a long time even before the Russian invasion of Ukraine. We have also identified cyber risks as one of our supervisory priorities for the coming three years. European banks are allocating a lot of resources to this area, and as supervisors we call on banks to strengthen their cyber defences, as Russia´s invasion of Ukraine has elevated the threat of cyberattacks.
In your talks with the sector about the Russia-Ukraine war and the risks it could present, have you specifically discussed this?
Yes, it is something we have been discussing for a while, and these discussions have intensified in recent weeks and months. One of our top priorities for this year is improving banks’ defences against this risk.
How well prepared is the sector for these risks?
A lot of progress has been made, but I’m still not sure that banks are at the point where they should be. The risk is still very high.
We are also seeing that certain banks, taking advantage of the open global environment for IT services, have outsourced critical functions to other entities operating from faraway countries. This was already a concern during the pandemic because certain banks had outsourced services and critical functions to countries such as India, for example, which were under a lot of pressure because of the spread of COVID-19.
The situation was ultimately manageable but continues to be a concern. Now the risk is with those banks which have critical functions and IT centres in the areas hit by the Russia-Ukraine conflict. More generally, other areas in the world could also be prone to geo-political tension, impacting on the banks’ ability to continue performing key functions.
Cyber defences and digital vulnerabilities are issues that will occupy much of our attention going forward, and we are aware that we have only taken the first steps towards meeting this challenge.
Another major concern is managing stocks of doubtful loans, which was already a concern for the ECB during the pandemic. Have the banks responded to the letters you sent to their CEOs about this issue?
I'm very pleased we sent these letters because as we are seeing strengthening credit risk controls is important, even after and beyond the pandemic. I think the letters and the processes they initiated enabled us to identify several shortcomings in how banks manage credit risk and doubtful loans. This has already been reflected in the scores we have awarded banks in 2021 and the resulting Pillar 2 capital requirements.
In most cases we worked with the banks to draw up a set of expectations on how we want them to remediate the shortcomings we identified. Now our supervisory teams are following up with the banks on this remediation process. So I think that was a very fruitful initiative, which makes our banks more resilient and better prepared to face the asset quality deterioration that the worsening outlook may cause in the coming months.
Are you satisfied with the industry’s profitability?
In January we met with investors, market analysts and ratings agencies – and they were very upbeat about the European banking industry’s prospects. Many banks had announced major plans to boost profitability in the coming years and enhance the renumeration of their shareholders. Unfortunately, the war has somehow disrupted these plans, and although we continue to see a positive trend compared to prior years, we have to see how the situation develops over the coming months and how it will affect the trajectory of bank capital and profitability in the coming years.
What was the key to banks’ resilience during the coronavirus crisis?
It was a range of measures that was implemented alongside the intervention of monetary and fiscal policy, and the fruits of the efforts made since the last financial crisis. The banks’ ability to weather the COVID-19 crisis was largely due to their strong capital position.
Unlike after the collapse of Lehman Brothers, this time the banks had sufficient capital to avoid materially tightening their credit requirements ahead of a shock, and to continue lending to households and firms, which avoided a negative spiral in the economy.
So those higher capital requirements, to which banks opposed some resistance, have done their job?
Absolutely. Sometimes banks’ view is that such capital requirements have a negative effect on credit flows and on growth and employment, but that’s misleading. We need a robust banking system in which the loans required by the economy are available even in a crisis.
Do you regret the restriction on the distribution of dividends?
I have stated publicly that I have no intention to do it again. However, if we were to go back to the beginning of the pandemic, I would make the same decision to generally restrict the distribution of dividends. I would do exactly the same because it was a moment of unprecedented uncertainty. We knew that a major recession was coming and we didn’t know how the distancing measures and the standstill of our economy were going to impact each bank, including institutions with ostensibly high levels of capital. There was no visibility to distinguish among banks, which is why it was necessary to exceptionally ask them all to retain capital.
Are you missing any tool as supervisor?
There is currently a debate in Brussels on the implementation in Europe of the finalised Basel III standards. I think that it’s very important to implement the reform in accordance with what was agreed in Basel.
Beyond that, I feel that we have the right tools to properly supervise the banking sector. What does happen is that, sometimes, they are not sufficiently harmonised, which leads to European directives not being implemented homogenously across all countries. This requires us, the ECB, to implement different laws across Member States. That’s why we need a major push to further enhance regulatory harmonisation and fully complete the Banking Union.
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