Interview with Helsingin Sanomat
Interview with Anneli Tuominen, Member of the Supervisory Board of the ECB, conducted by Anni Lassila on 29 March
4 April 2023
What should we think about the recent turmoil in the banking markets?
The problems we have recently seen have largely been specific situations that I would definitely not extrapolate to the banking market as a whole. The situation of Silicon Valley Bank in the United States and the problems at Credit Suisse were specific to the individual banks. Yet they also create some uneasiness about healthy banks. Moreover, the economic situation is surrounded by high uncertainty owing to high inflation, rapid increases in interest rates, high energy prices, a weak growth outlook and Russia’s ongoing invasion of Ukraine. These elements already provide fertile ground for rumours to spread.
In this crisis it was once again surprising how easily bank share prices were derailed everywhere although, as you said, the situation of Silicon Valley Bank, for instance, was unique. Does it still surprise you how easily this sector can be pulled into a kind of psychological vicious circle?
The current situation also has an impact here, together with the fact that there are several sources of uncertainty at the moment. In such circumstances, even the smallest ripples through the market are watched closely.
Social media posts may also lead to rumours spreading even more quickly. Some posts are not based on facts, some could qualify as manipulation and some may, in the worst case, even be part of hybrid influencing activities. Hybrid influencing is, by definition, difficult to trace, but there is no evidence that it has been used in the context of bank crises. That being said, we should all be aware that there may be attempts to influence decision-making and public opinion through dishonest practices.
I would also like to mention the recent events in the crypto markets. They have sparked fears that the problems could spread to the financial sector. Enhanced regulation and supervision of crypto markets is therefore needed – and will be introduced. Banks currently have only limited exposures and links to crypto-assets, but this needs to be monitored. Personally, I am very critical of crypto-assets. They do not necessarily add value for society, and in the worst cases they have been used for criminal activities.
The problems at Silicon Valley Bank have been linked to the fact that the regulation of medium-sized banks has been weakened in the United States. Should the United States return to tighter regulation for medium-sized banks?
Absolutely, in the United States the same supervision that is applied to larger banks should be extended to smaller banks too – although, with a balance sheet of USD 200 billion, Silicon Valley Bank was not particularly small. At present, not all of the changes made to the Basel framework have been applied to medium-sized banks there. And these banks have not been subject to stress tests as frequently as large banks.
Are there similar time bombs in the valuation of bond exposures in the euro area in some areas outside liquidity buffers?
Based on our assessment, the overall picture of the banking sector is not a cause for concern. Supervisors scrutinise each bank’s balance sheet, and this scrutiny has not led to any concerns in this respect.
The extent to which euro area banks have managed to reduce the volume of their non-performing loans in a short period of time is astonishing. What are the implications of this?
The volume of non-performing loans in the euro area has decreased from more than €1 trillion to approximately €340 billion. This means that non-performing loans now only make up around 2% of the stock of outstanding loans. It is a very large decrease that is the result of a massive effort – and could be seen as a clear example of strong determination. It has not always been easy, because banks have had to recognise sizeable losses as they have cleaned non-performing loans from their balance sheets.
How much worse would the current situation be if we had faced it without this exercise?
It does not make sense to speculate – this is what was done. There have also been unforeseen events, not least a war in Europe. But ECB Banking Supervision was established precisely in order to create a centralised supervisor that is sufficiently rigorous and demanding, and that stands ready to take even more rigorous supervisory action if necessary, even when supervising banks that are in trouble. I don’t think that this would have happened with each country going it alone.
A year ago you told us in an interview that there was still room for doubt as to whether loan books were as healthy in reality as they looked on the surface.
One of our supervisory priorities over the past few years has been precisely this: to ensure that banks classify loans appropriately, book sufficient provisions and understand what their loan books contain. Banks’ governance culture has been another area of focus. We have seen that many of the deficiencies identified in the business models of banks that have run into trouble were actually the result of shortcomings in their management. For instance, if a bank has an overly authoritarian CEO or Chair of the Board, the consequence may be that this one dominant view cannot be challenged. This may lead to things going awry.
Can consumers be confident that the banks under your supervision will remain standing?
It has already been stated publicly that euro area banks are in good shape. On average, their CET1 capital ratios are at solid levels of 15%. Their liquidity buffers are also healthy. Since our inception in 2014 we have been examining banks’ loan books, management and internal credit risk models very closely. And in 2021 we launched a targeted review of how they manage interest rate risk and how they can predict depositor behaviour. So we have already been paying attention to these important topics for a long time.
For each bank we have a dedicated team of supervisors who are in regular contact with the bank’s management. And when there is an issue, they are in contact almost every day.
In early 2024 banks will also be subject to a cyber stress test. This is something new in the field of banking supervision. One of the aims of the stress test is to gauge how well banks can limit the impact of cyberattacks and ensure they can continue to provide their services. Fortunately, there have not yet been any truly serious cyber incidents.
How are stress tests for cyber risks carried out?
This has not been determined yet; the tests are currently being designed. In fact, similar tests should be performed across all areas of society, for instance to test how society would function and how payments would work if the electricity supply was cut off.