Interview with Süddeutsche Zeitung
Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Meike Schreiber and Markus Zydra on 16 December
26 December 2022
Mr Enria, your job can be an ungrateful one. When something goes wrong for European banks, you get the blame. When you warn too early and too much, there’s also opposition. Are you under a lot of pressure?
I’ve been doing this for a few years now, but yes – I sometimes have trouble sleeping. We have two problems. First, the economy is deteriorating. Banks need to manage that and we as supervisors work to ensure that they are able to do so. But the second problem is how the financial markets overall are going to react to the challenges presented by the worsening economic outlook and the tightening of monetary policy with rising interest rates. This is something that is much more difficult to predict.
How are you dealing with the pressure?
My wife is a good influence on me, we read, go for walks. At weekends we visit places around Hesse. I also enjoy going for a run early in the morning.
You have been a target for bank chiefs recently, and the attacks have been coming from all quarters…
Well, certainly not from all quarters – I get good feedback too. It was much worse when I started at the European Banking Authority back in 2011. For me it is important to remember that our job is not about being liked by banks but about making the right decisions. We do that not only to protect customers, taxpayers and investors – we do it for the banks themselves too. In the long term, strong supervision is a good thing for everyone.
We feel that recent criticism has been very aggressive in tone. The chairman of Société Générale wrote a biting criticism. Deutsche Bank chief Christian Sewing said he had no need of a supervisory authority that tells him what to do. Just to name a few examples.
European banks are facing a challenging situation – on the one hand, their share prices are very low. On the other, 2022 has been quite good for many banks – despite the war and the energy shock. Many bankers are keen to keep up the good mood. Please don’t get me wrong – I’m not all doom and gloom, but it is our job to remind banks that there could be a severe recession. We are therefore saying that they should remain alert. But, of course, some may feel like we’re spoiling the party.
Recent criticism has focused on complaints about the ECB taking part in meetings of banks’ supervisory boards.
This is a misunderstanding. We don‘t take part in the meetings of banks’ supervisory boards on a regular basis, just occasionally and with the specific goal of understanding how a bank is governed. When banks struggle, it’s mostly because supervisory boards haven’t looked closely enough. This is why we want to know how the supervisory boards discuss things internally and whether they are effective in challenging management.
Criticism was levelled by Lorenzo Bini Smaghi, chairman of Société Générale, who said exactly the opposite when he was at the ECB. Are you disappointed?
Everyone is free to change their mind. What disappoints me at times is when I sense a lack of understanding that it is part and parcel of European banking regulation to introduce common standards. When we started the banking union, we looked for the best supervisory practices across Europe and then rolled them out consistently in all the Member States.
Are bankers dangerously complacent again, almost 15 years after the financial crisis?
I wouldn’t go that far. Banks have definitely improved their risk management. But what I have seen is history being somewhat forgotten. We see this in the debate on the Basel III capital rules, which set out tighter standards for the calculation of capital requirements. There are new people at the helm of finance ministries and in the European Parliament, who do not seem to have a clear recollection of the financial crisis. And there are politicians who again think that they need to get laxer rules for their home banks, in the mistaken belief that this will support lending and growth.
Can you see any moral hazard with banks, a sense that the taxpayer would save the banks if worst comes to worst?
I see a new kind of moral hazard, which was triggered by large fiscal, regulatory and monetary measures introduced at the height of the pandemic. Banks then considered themselves part of the solution rather than part of the problem. And yes, banks continued to supply their customers with credit. But that was also largely due to the public support created for that purpose. Now that support is over. Central banks are normalising monetary policy, and governments have less fiscal space and realise that massive public support would feed inflationary pressures. There is a danger that banks have not yet noticed that the situation has changed and that public support, if any, will be much more targeted and less sizeable than during the pandemic.
What has shocked you the most recently?
It was in October, when the new budget announcement in the United Kingdom resulted in the pound and British sovereign bonds plunging in value. The Bank of England had to intervene. As supervisors, we naturally keep a close eye on the risks outside the banking sector, but I wouldn’t have thought that it would be pension funds that would create such a dangerous situation...
... British pension funds have narrowly escaped their “Lehman moment”. The funds had invested massively in British sovereign bonds and were suddenly forced to provide extra collateral. The collapse was only prevented by the Bank of England buying up large amounts of the bonds. Are we going to see more of that?
Market liquidity is indeed a problem. In the past there were always some market-makers willing to intervene and buy when assets were being sold fast during an episode of market stress – now this is no longer the case. The situation is very fragile. The current level of leverage in the financial system is also much higher than after the 2008 financial crisis – and this is happening outside the banking sector, where we can’t see it very well. That worries me.
Deutsche Bank and other international credit institutions are once again making risky transactions. Is history repeating itself?
Fortunately, we are living in a world that is different from the frenzy of the years before 2008. Banks are better at managing their risks, even in transactions involving complex securities. But there’s a different problem: certain derivatives are well-suited to hedging the risks arising in ordinary business. But financial institutions are also buying these derivatives when there isn’t anything to hedge against – basically when they want to make a leveraged bet on certain assets. We, as supervisors, don’t differentiate in such cases since global regulators have decided that we shouldn’t differentiate across financial products according to the purpose they serve, as this would be very difficult. And as long as everything goes well, there’s no problem. But when things go downhill again…
…you’re talking about the collapse of hedge fund LTCM in the 90s?
…that leads to the second issue. Following the collapse of LTCM people thought it would be too difficult to monitor all of these barely, or not-at-all regulated hedge funds and similar intermediaries…
...they’re also referred to as shadow banks.
The goal at the time was that regulated banks should in future pay more attention to which non-bank financial institutions they are doing business with. The thinking was that it would make the riskiest, most leveraged shadow banks disappear, in a sort of disciplinary action. But that didn’t happen. Banks are often unaware how risky their business partners from that sector really are. This interface between normal banks and shadow banks is dangerous. That’s where we have to watch out. If there is a sudden shift in the perception of risks, then suddenly everyone wants to sell and reduce exposures. That is when everybody looks for the exit and there could be accidents, also involving banks, as we saw in the case of Archegos, a small family office whose failure generated big losses at major global banks.
What can the ECB do to ensure a proper valuation of complex financial products and prevent panic selling after a shock?
We regularly send supervision teams to banks. They do random checks, look at the balance sheets and the valuations of the securities. If the valuation models are bad, we insist on immediate improvements. But we can’t send an army of supervisors every single year to screen all of a bank’s risky products and spot where mistakes were made in the valuations. That is not feasible. The bank itself needs to make sure that it has robust internal controls. We are putting a lot of effort to make sure that that is what happens.
Supervisors are always one step behind?
There is no other way, unfortunately. The banking sector is constantly developing new products, and regulators and supervisors can only do their best to catch up. That’s the reality we face.
Credit Suisse has just run into difficulties. It was recently bailed out by a state, specifically Saudi Arabia. Switzerland has made itself even more dependent on an autocracy. Would we accept something like that in the EU?
Europe should remain an open economy, which means that we should, in general, stay open for foreign investors. But, of course, we need to check the quality of the investors and the origin of the funds, because we only want clean money here.
Credit Suisse was apparently about to face an actual run on the bank. Customers were withdrawing their money in droves. Were you worried?
I was worried about how quickly the markets reacted there, also triggered by unsubstantiated claims that had been rapidly spreading on social media over the weekend. In the current market conditions it seems that investors only need to see a bit of smoke to get them running for the hills. That didn’t use to happen.
Could bank mergers lead to increased stability?
Yes, they could, if they are well conceived, with a strong business plan. Cross-border mergers within the banking union could also enhance the resilience of our markets in case of a shock, but there’s still a lot of political debate about that. When a major bank in one country takes over a different bank in a neighbouring country, you immediately hear, “We’re losing our savings; our money is being used to support other people.” But that’s misleading. A more integrated banking sector would be stronger and favour a better allocation of the large pool of savings we have in the banking union, for the benefit of our economies and citizens. I hope that the politicians will eventually understand that.
Your term ends in 2023. What have you achieved?
I believe we made good progress in making our banking sector stronger. But we also managed to improve the collaboration between the ECB and national authorities, which is essential for effective and efficient supervision. In the first years after the centralisation at the European level of a complex task like banking supervision, some tension between the central authority and the national ones was unavoidable. My goal was to overcome those tensions and to improve cooperation.
We also showed that the banking union benefits banks. They can now benchmark themselves against their peers across the union. We put them in front of a mirror to show them how strong or weak their practices are. That also helps us to disseminate good practices across the sector.
Do you ever watch things like Wall Street or Bad Banks?
Sure, sometimes, but to be honest they’re not my favourites. I see what happens inside banks every day in my supervisory role, so why would I also want to see that at the weekend?
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