Interview with Expansión
Interview with Anneli Tuominen, Member of the Supervisory Board of the ECB, conducted by Andrés Stumpf
22 May 2023
Is the banking turmoil something specific to the United States?
The business models of the banks concerned are very specific and different from those of the banks here in Europe. They had a very specific depositor base, which was concentrated in the technology sector. And they invested heavily in government bonds, which, although not exposed to credit risk, had considerable interest rate risk. This isn’t happening in Europe, where the depositor base is more diversified. Data from the International Monetary Fund show that if debt securities held at amortised cost were to be assessed at market value, the impact on capital would be less than 50 basis points. It would be more than 250 basis points for US banks, so there’s a big difference.
What do you think went wrong at the banks where the authorities had to intervene?
There was a governance problem. That was the main issue in my view. The board should have oversight and focus on the risk outlook in its decision-making. But it’s also a case of ineffective regulation, as smaller banks weren’t subject to the same requirements as larger ones, for instance for liquidity. A recent report by the Federal Reserve acknowledges that supervisors didn’t see the bank’s vulnerabilities in time and, when they did see them, they didn’t react quickly enough to address them.
If the situation deteriorates further, could it lead to contagion in Europe?
As banking supervisors, we know that you can never say never. But our banking sector is resilient in terms of both capital and liquidity.
So you’re not worried?
The European banking system is strong. But, as supervisors, we of course need to keep a close eye on the situation. It’s important to monitor the quality of the assets on banks’ balance sheets, as they can be affected by interest rate hikes. We actually started looking into this in the second half of 2021 when the first signs of inflationary pressure emerged. The recent market developments also show that even more attention should be paid to the liquidity and funding risk outlook, and as supervisors we are doing this already. For instance, one of the four elements of our annual Supervisory Review and Evaluation Process (SREP) focuses on risks to liquidity. We have also already highlighted the need for banks to develop, execute and adjust sound and reliable liquidity and funding plans in the context of our supervisory priorities for the next three years. And, together with the European Banking Authority, we have launched an additional data collection exercise as part of the 2023 stress test. The aim is to assess unrealised gains and losses on banks’ balance sheets and related hedges. Although non-performing loans (NPLs) in the sector remain low for the time being, that can change and the banks need to have adequate provisioning.
What are the biggest risks facing the banking sector?
The macroeconomic situation is still quite uncertain and credit risks may arise. Moreover, in an environment of rising interest rates, there is always a risk associated with these rate hikes. In the euro area banking sector we haven’t seen a situation like the one we recently saw in the United States, but we need to remain vigilant. Against this backdrop, it’s more important than ever that banks continue to improve their internal governance. And they should also be paying attention to new areas like cybersecurity and climate risk.
You mentioned governance. What’s your assessment of governance in Spanish banks?
There are banks with stronger and weaker governance in every country, so we can’t generalise. But, if we look at the results of the SREP, a lot can be improved. I know that lots of bankers are not very satisfied with our approach and think we are too demanding. But it’s a good thing that we are demanding about the quality of a bank’s internal governance. There’s room for improvement.
What are the main weaknesses?
Governance depends on a bank’s board of directors and its ability both to ensure that the bank is managed correctly and to challenge decision-making. The latter is something that happens less often than we would like. And this is particularly true when the chain of command between the executive and supervisory functions is less clear. That’s why the ECB prefers a structure with a non-executive chair. The management teams also need to be diverse, and the board members should have complementary skills. Quality debates are crucial to effective management. In this regard, we have identified gaps in the skills of non-executive directors in some banks. Directors need to build on the expertise they bring to the boardroom, especially now that there are topics requiring specialised knowledge, such as digitalisation and climate change. In addition, the management bodies need to have the best possible data to be able to make decisions, and this is not always the case. Banks need to make a greater effort to improve their data aggregation systems. This would help the banks and the supervisor, as we would have more information to work with.
Is the ECB concerned about the lack of independent board members in banks, as is currently the case with Unicaja?
I cannot comment on individual banks. As I said, in general, a robust governance structure is essential for banks.
There has been an increase in dividends in the Spanish banking sector after a series of solid results. What’s your view on this?
When banks satisfy the required conditions to distribute dividends, we don’t have an issue. To assess this, we look at how each bank has performed over the past few months and ask them to draw up realistic forward-looking scenarios. If they remain above the requirements in these scenarios, they are free to distribute dividends. Dividends are part of the way the market works. If you invest in a bank, it is natural to want something in return, so healthy banks should be able to pay dividends.
Does the ECB need new tools to bolster its supervision?
Our supervision is effective, and we are already delivering on our responsibilities. We don’t need to overhaul the system, but of course there are proposals on the table that could improve the framework. The reform package on bank crisis management and deposit insurance proposed by the European Commission is one example. And we would also like the legislation of every country to include ex ante reviews as part of fit and proper assessments. In other words, we think that directors in all countries should wait for our green light before taking up the role. For our part, we are focused on improving the effectiveness of our supervisory response.
What do you think about the expert group’s report on the SREP?
We welcome the review. We have received good suggestions from the expert group, as well as from the Commission. We are analysing them and will see which aspects we can take on board to strengthen our supervision. Supervisors are already applying a new risk tolerance framework to all significant banks, which will enable them to better focus on strategic priorities and key vulnerabilities. It will also allow for more flexibility in planning activities based on a multi-year SREP. There will be a more thorough review in the second half of the year, and implementing the findings of that review will be one of the tasks of the new Chair of the ECB’s Supervisory Board, in 2024.
And what you think about the critical report issued by the European Court of Auditors? It says that you gave special leeway to banks with a higher share of non-performing assets on their balance sheet.
Reducing the volume of NPLs has been and continues to be a key objective of the ECB’s supervision. And the results are clear to see. Since the start of European banking supervision, the volume of NPLs has fallen from around €1 trillion to €340 billion. In the past, we asked banks with higher NPLs to develop a clear strategy on how they would reduce them. These strategies largely sought to enable the banks to dispose of their NPL portfolios. But to do so the banks needed to have a certain capital buffer, because if selling NPLs meant that they would not meet the capital requirements, they would not have been able to get rid of these portfolios. In other words, to become healthy banks that could provide credit, they first needed to reduce their NPLs. That’s why the supervisor showed some flexibility. And, as I said before, it worked. The European banking sector is more robust and has been able to withstand the consequences of extraordinary shocks like the pandemic and the Russian invasion of Ukraine, in part thanks to the fact that these portfolios are no longer weighing on banks like in the past. We have created a level playing field for all significant banks in the euro area.