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Andrea Enria
Chair of the Supervisory Board of the ECB

Interview at the European Banking Federation boardroom dialogue

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Wim Mijs, CEO of the European Banking Federation on 28 September 2023

2 October 2023

In this boardroom dialogue, I want to look back and I want to look forward with you, Andrea. So a very warm, warm welcome and great to have you here. And it’s very strange for me to think that this is the last one. If you remember, your first appearance in the boardroom dialogue was in 2019, so we didn’t know that we would have both a pandemic and a war going forward. It is incredibly important to have an actual dialogue rather than just the sending of messages. And the understanding that you and your colleagues helped to bring helped us immensely. If we look back at your key supervisory task, at cleaning up banking balance sheets and non-performing loans – I see you haven’t forgotten and neither have I, but it seems always far away – is the peak of the non-performing loans a bad memory of the past or is it still simmering?

First of all, thank you very much for your kind words. I am humbled to hear all this positive feedback and I hope the last three months will be quiet. Yes, you are right. I remember when I was starting almost five years ago, there was still quite a significant focus on the need to complete the cleaning of the banks’ balance sheets. And I must say that today we can, collectively to some extent, celebrate the fact that indeed this process has been completed. We started with more than €1 trillion of non-performing loans (NPLs). It took a long time and it was painful. I know that when the European Central Bank (ECB) went forward with quite demanding expectations on non-performing loans, this was not a walk in the park, also in the dialogue with the banks. But eventually, I think that it was the right thing to do. I think that the banks played ball, and we are in a much different place today. We have an NPL ratio of 1.8%. If I remember well, the last figure was a little more than €300 billion. We have really made a lot of progress here. Is it the memory of the past? There were moments during these years in which we feared a new wave of non-performing loans, which didn’t materialise, luckily enough, for a number of reasons. One of these reasons was, of course, strong fiscal support, government guarantees. But I also think it is a lot of work that we have done – in the Single Supervisory Mechanism (SSM) and the banks – to strengthen internal risk controls. And I think that this, in my view, is the best legacy in terms of making sure that the next time around we won’t have the same piling-up of non-performing loans that we saw in the past. So I am quite reassured that this rather surgical work that we have done on internal controls, on different types of risks, will, I think, deliver a much stronger way of addressing these issues going forward.

I agree with you. But now if we step to internal models and we remember from the Basel discussion that it was, of course, a core part of the discussion. Can we trust our models now? If you look at them all and the TRIM work you have done, do you feel that we are right and that they are close to realism?

It has been a huge work, no denying. It has been the largest project ever done at the ECB, both in terms of staff, resources and a huge effort also on the side of the industry. Very impactful. I have to be honest with you: there was a moment immediately after the great financial crisis when I, as many other people, was asking myself whether to go on with the internal models or not. I mean, they didn’t work well, there was a lot of noise, also on consistency across banks. The investment to repair it, both from the regulatory point of view and from the supervisory point of view, was huge. Now I am glad that we decided to embark on this journey. We did this huge process, and I think that eventually we managed to bring the models onto a much stronger footing. And I think we can trust them. To some extent, I am a bit saddened by the fact that our partners in the United States, our colleagues in the US authorities, decided, for instance on credit risk, not to use and not to rely any more on internal models for the determination of capital requirements. Of course, this work needs to move now to normal business supervision, and we are doing that. There is still a lot of work to be done to implement all the new European Banking Authority repair processes. But we are I think in a very strong place. In terms of engagement from the industry, I sometimes see that banks tend to complain about risk-weighted asset density being more favourable for the competitor or our process being excessively harsh on this bank or that bank. And sometimes I saw remarks that were trying to convey the impression that we were using the internal model inspections as a way to raise capital requirements through the back door. Honestly, I think we need to realise that we have developed a lot of expertise internally. We have on-site teams that go deep into the models. There is no hidden agenda. We are just trying to strengthen this important pillar of supervision. And the last point I want to make, which also requires a commitment from the industry side, is that we need to simplify the model landscape. We have too many models. Sometimes models are put in place just to spare a couple of basis points of capital on minor portfolios. This is huge work on the side of the industry, on the side of supervisors. I think we need to take the implementation of the final Basel package as an opportunity to go further in streamlining there.

That is a clear message, which leads me to my next question, which can be explained either as a very innocent question or as slightly provocative, depending on how you see it. Because if you look at strengthening governance, do you feel that all the supervisory checks can be done effectively without dragging on business decisions? Some of us have gone to fit and proper tests, so you know where I’m going with this one. So I leave it to you to decide if you see it as innocent or slightly provocative.

I know that this is a delicate issue. But look at the Silicon Valley Bank and Credit Suisse cases. If you take the banks a few days before default, capital ratios were in a pretty decent place. The liquidity coverage ratio was not calculated for Silicon Valley Bank, but also from that point of view it was actually pretty solid. What was really wrong was the governance. If you take Credit Suisse, there was identification of a major failure in internal controls already by the bank itself, in its own independent report on Archegos in 2021. And still in 2023, a few days before the crisis basically, auditors were saying that the internal controls were not supporting the valuations. That was also impactful. It is clear that when you have governance and internal controls that are not in a proper place, there is no level of capital which is strong enough and good enough to prevent a crash. So when we see that, there is a need to do something from a supervisory point of view. But, of course, there is a difference between seeing a weakness in the capital position or the liquidity position and a weakness in governance. Of course, you cannot just intervene. This is something where the management and the boards need to take ownership. So we need to find ways to be effective in this area. It is not easy. We are developing a number of tools and a number of practices. We are trying to be very respectful of the working of boards. But when we see things that don’t work, we need to make clear that change is needed. When we see a business model is not sustainable, again we need to be able to intervene, and sometimes forcefully. And that is not easy, but we cannot avoid it. If you read the report of the Federal Reserve on Silicon Valley Bank, it’s clear that they were identifying one of the major issues, maybe identifying weaknesses, and were not able to escalate to enforcement fast enough. And we have, honestly, very much the same issue. If you look at our Supervisory Review and Evaluation Process (SREP), there have been a lot of findings on governance and a lot of recommendations on governance, and, after years sometimes, you find these recommendations reiterated and not yet properly addressed. We need to find ways to be more effective in that space.

I agree, and I think you will agree with me because what you’ve been saying since Silicon Valley Bank is that the regulatory framework in Europe was sound, while there was an almost knee-jerk reaction to change the regulatory approach. My personal view is that Silicon Valley Bank would not have needed more regulation. It would have needed a more proactive supervisor, which is my personal pain, because the way I see it, you can buy a very expensive guitar, but if you don’t practise then you still can’t play guitar. And that was a little bit the feeling I had there. But that’s very much my opinion. Now if we move beyond the supervisory task, the pure supervisory task, I know that you have an ambitious objective for the European banking industry and, as you have pointed out many times as the head of supervision, you cannot drive the market. Thankfully not. But you can do everything in your power to create the conditions in which these banks would thrive. So can you assess a little bit, looking back, the degree of progress on market integration, like branchification? Would it fill the gap until we complete the banking union?

This is an area in which I have to acknowledge that, with respect to the programme that I set out in front of you five years ago, progress has been minimal, maybe even non-existent. There has not been progress in this area. I think on our side we did a lot to enable this progress. When I joined, there was this rumour that, basically, mergers were not possible because the ECB would impose additional capital requirements. So, we clarified that this was not the case. Or because we wouldn’t have acknowledged or recognised the badwill. We said clearly that this was not the case, and we said clearly that we would treat cross-border and domestic mergers in exactly the same way. We have tried to create an environment in which banks can also use the limited space provided in legislation in terms of waivers for liquidity. So far these have not materialised, unfortunately. And eventually, I also mentioned the possibility, which was triggered by the observation of what the banks relocating after Brexit were doing. Almost all the banks – JP Morgan, UBS, Morgan Stanley, Goldman Sachs, etc. – have adopted a European company statute in terms of corporate law and they’ve used the Cross-border Merger Directive to merge the subsidiaries into the parent companies.

So they are now branching out, basically, so they don’t have any issue of capital or liquidity trapped in individual countries. And it came to me, I’m old enough to have been around when the second Banking Coordination Directive was implemented in the late 1980s, and I remember at the time we thought that integration would have happened with German banks opening branches in Italy, French banks opening branches in Spain and the other way round. So, I said: we can do it. ECB Banking Supervision has the responsibility, so we opened this up. It didn’t happen for a number of reasons that would be interesting to investigate further. But the option is still open, and I think that could be interesting. The attractive point for me is that, to be honest, in these painful debates between home and host countries, there shouldn’t be any home and host within the banking union. But, again unfortunately, it is still there. The argument of the host countries is “If things go wrong it’s my deposit guarantee scheme that pays”. So if you go to branchification, you take this argument off the table. It is the home deposit guarantee scheme that foots the bill. So that’s a way that, in my view, would move us into a different space. This doesn’t mean that we could do without the European Deposit Insurance Scheme. I think that we would still need to complete the banking union in order to have exactly the same safety net for every deposit in the 21 Member States participating in European banking supervision. But it could still be a step forward, and if the industry wants to investigate practical implementation, we stand ready to assist.

I am very much with you in hoping that happens. But if you look at the depressed market valuation of European banks, if you look at the resilience, resilience is up, profitability is back, as unfortunately politicians have also seen, for all the wrong reasons, but market prices are clearly on the book value in my view. Are we going in the right direction here? As I would always say, are we sailing into the wind? Do you believe in the European banking sector, if you look at its resilience, if you look at its profitability, that we will be able to fund the needs of the economy and society going forward?

Of course, it’s not up to me to say, as a supervisor. My impression is that the issue is that when, to some extent, your reputation is tainted, recovering it is a long journey. I think the Belgians actually say that reputation goes on a horse and comes back on foot.


And the European banking sector had this long journey to transition out of the impact of the great financial crisis. It’s very difficult for me to justify depressed valuations after what we’ve seen in terms of strengthening the balance sheet, in terms of cleaning the balance sheet, and in terms of also changing the business model. Recently, we’ve seen a lot of progress in that space as well: rebalancing business models – doing focused acquisitions or sales of lines of business that have recomposed business models on a more sustainable footing. A lot of progress has been made, but when we engage with investors and analysts, the feedback is that “One good year is not enough. We want to see more. We want to see more sustainable profitability”. I’m sure this will be there and I’m confident that eventually this transition will also be recognised in market valuations. Let me say, however, that so far the way in which banks have approached this issue has been basically to change their distribution policies – to do more buybacks and enhance distribution, with a view to convincing investors to push the valuations up. And this is perfectly fine, I understand it. If the bank has capital space, we have accommodated this process. However, the point is, when do you get, as a banking sector, to start investing in yourself, to start looking more to your growth and to your development? This also links to the issue we were discussing before, of investing also in developing your franchise, in diversifying your sources of revenue. And there is a sort of chicken and egg issue. To some extent, one could say “first I raise the valuations by returning capital to investors, and then I invest”. But maybe there is a moment in which you should also convince the investors that you have a growth agenda which is attractive? In the EU, for instance, European banks have not invested enough and are not investing enough in this European opportunity. So you don’t see the banking union as your domestic market. I see, in Brussels, a lot of effort – and “chapeau” for the results – in terms of getting lower capital requirements on this or that area of business, but much less effort on getting a more European market working, on getting down the constraints on waivers or getting a more unified approach. So the banking industry could probably put a little bit more firepower into investing in Europe and developing its own investment agenda. With the green and digital transformation, there is a lot of room to think European, and I would advise you to think about how to do this better.

I see this a little bit as a question to me, and I’m pretty passionate about it. It’s nice that you call it a “chicken and egg” problem, but in my view the whole farm has to be aligned, not only the chickens and the eggs. Because the political environment makes it incredibly unattractive to do exactly that. I strongly believe that – in view of the huge investment that is needed for the sustainable transition of our economy and for the digital transition of our economy – the funding of banks, or at least the financial sector, should be part of the open strategic autonomy plans. They are not. On the spending side, the plans are pretty set. On the funding side, the plans aren’t set. And I will continuously try to make Europe – and all of Europe, not at the national level – more attractive to invest in. I understand why the capital and liquidity restrictions are there. But, like you, I still believe in the banking union, so they shouldn’t be there. I will be banging on the door for many years to come, so thank you very much for giving me that opening. But if we now talk about unexpected events, you had the pandemic to deal with, you had the war in Ukraine, we had the turmoil in March with SVB and others and Credit Suisse. What lessons have you learned? What advice would you give to banks and maybe your successor on dealing with these unexpected crises?

Let me start with a bit of self-praise. You shouldn’t do that, but it’s not self-praise for me, it’s self-praise for my team more than anything else. The SSM is a pretty complex machine. It’s a tanker. We are not only the team here in Frankfurt – we connect with 21 authorities. We have all our internal procedures, which are not always simple, to use an understatement. Still, during this sequence of shocks, I think we showed a surprising (surprising to me as well) agility, in terms of the speed of reaction. The pandemic struck, and in a few days we came out with a relief package: postponing the stress test, adopting a light SREP process, reducing data requirements, suspending inspections and moving to more remote inspections, releasing capital buffers… I think that was a surprise. Of course, there was also the other side of the coin, which was recommending to suspend distributions. I think it was a package that in any case was very well coordinated with the monetary policy package. It conveyed an immediate power of reaction and was very effective. We also moved more to sectoral analysis that we didn’t do before, focusing on the sectors most affected by COVID. When the Russian invasion of Ukraine came, we communicated very fast with the market on our assessment of the situation. We shifted our focus to commodity trading, energy, IT and cyber risk, and operational resilience. That was also a very fast refocusing of the supervisory activity, which I also think was very effective. And in the case of the unprecedented, fast hiking cycle in interest rates, we have moved very fast as well. When the first signals of inflation were building up already in 2021, we started reviewing interest rate risk in the banking book and credit spread risk. There was a lot of focus on liquidity and funding that helped a lot in my view to prepare the response to what was happening. So, all in all, this is in my view one of the strong benefits of the SSM – that we’ve built a machine that is reactive and is not just administrative, ticking the boxes. And I want to praise my team here for having led this cultural focus on risk. On other lessons, maybe one that we mentioned already to some extent is that when you enter a moment of turmoil, markets shift very fast from looking at the same indicators we look at – balance sheet indicators, liquidity ratios, capital ratios and P&L – to mark-to-market, to market valuations and to looking at banks from a “liquidation value” perspective. And I think that there we need to sharpen our supervisory tools a bit. And also on the banking side, we need to start thinking more about resilience on the funding side – about the diversification of sources of funding. What was good was the speed with which banks were able to engage with investors, to explain that they were not like Credit Suisse or SVB, and to give a clear picture of where they stood. But we need to learn how to factor this in more structurally in our supervision. And then there’s the point we mentioned before on governance and escalation. We have plenty of issues that we identify for which there is no remediation within a short period of time. And I think that our mistake, if I may say so, is that sometimes we’ve identified a lot of findings when doing our supervisory work, and we’ve thrown all of them at the banks. And sometimes bankers have been telling me: “You gave me 1,500 recommendations, I remedied 1,350 and you still decreased my score.” And we are not good enough at saying: “This is really important, this is something we want you to remediate, this is the timeline to close this issue. And if you don’t do it, we will come at you with a hammer. And these other things are things that we bring to your table, but we’ll leave the remediation to you.” This ability – to be more focused in the issues that we identify, the timeline and the escalation – this is another lesson which, for me, is very important.

Indeed, that’s important. I have an anecdote from a very senior banker who had been reviewed and whose supervisor came with a long list of 1,300 things that were reviewed. And they were checked and he wanted to leave; this was a younger man. And then the old banker, when he was at the door, held him back and said “You forgot one thing: you haven’t asked me what actually keeps me awake at night, and it’s not on your list”. And that says it all about what’s important. And what you do feel – and what I must say I appreciate very much – I think that throughout this crisis, everybody experienced that approachability. So what I always call the “live supervisor” rather than the rules – you see people and there’s that approachability. We had numerous phone calls, and you were always easy to reach during crises. I think that’s very, very important as well. Now, my final question is a difficult one, because you leave large shoes to fill, and thankfully there is a lot of talent. But is there anything, if you look back at your own period, that you would like to give to your successor saying “This is something you really need to dig into a little bit deeper or change”?

Well, again, I think I should leave it to Claudia. Claudia’s a very strong person, very knowledgeable. She will have to shape her own agenda, and it would be wrong of me to tell her “do this, do that”.

But what were maybe your own lessons learned, the things where you said “whoa”?

The point for me is that we have initiated a very important cultural change in the SSM, which I think is shared by Claudia and by the Supervisory Board – which has this direction of travel that I mentioned to some extent: more risk-focused. When we started, we did the things that we know how to do best as Europeans: we sat around the table and we wrote papers, codified our processes, wrote manuals and pushed the process a little bit towards a “tick-the-box” approach. We are in this shift towards being more risk-focused, also in terms of the messages to the banks and also in terms of empowering the supervisory teams. That, for the Chair, is very important – the supervisory teams need to feel that the Chair is backing them, that he or she is empowering them to put their chips on the risks that really matter and has their backs. That’s one point. The other is supervisory effectiveness – and we will go with Fernando into the recommendations of the independent group that reviewed our SREP process. That’s the ability to be less capital-centric, as they say, and use other tools to escalate and sometimes move to enforcement – to qualitative measures with clear timelines and enforcement. If you need to do that, you also need to increase your legal risk appetite to some extent. You need to make the teams more willing to challenge the banks and sometimes also to have courts challenge your decisions. We need to accept that. And maybe the final point I will say to Claudia is, of course, this agenda of integration. There are not a lot of people around carrying the flag now, so I hope that she will feel sufficient passion to continue doing this, notwithstanding this being a very frustrating endeavour.

I will be happy to carry the flag with her because I think that’s going in the right direction. I’m incredibly grateful for all that you’ve done. As you’ve heard from me, you can do supervision in two ways. You can create a wonderful regulatory bureaucracy where you tick every box and still nothing “lives”. Or you can create a lively, open, interesting, serious, knowledgeable one, and you have helped bring that about and make our own supervisor in the banking union more mature, for which I’m very, very grateful.


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