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Andrea Enria
Chair of the Supervisory Board of the ECB
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Interview with the Financial Times

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, conducted by Martin Arnold and Laura Noonan

30 October 2023

What’s your take on the health of the eurozone banking sector as you come to the end of your mandate, with interest rates having risen to record highs and the eurozone economy looking particularly weak at the moment? What’s your take on the health of the sector?

I think we can say that the post-crisis balance sheet repair is basically completed. The capital position of the banks is much stronger. The cleaning of banks’ balance sheets most importantly – so the disposal or securitisation of non-performing loans – has proceeded very well, and the non-performing loans ratio now is at very low levels. We don’t have long data series for the euro area because we didn’t have a common definition before, but I think probably it is at a historical minimum in the countries participating in the banking union. And with the increase in interest rates, profitability has also come out of the depressed levels that have characterised the banking sector for a long while. This process is not yet over because valuations remain relatively depressed. The price-to-book value, on average, of listed European banks is below 70%, so still quite low, but there is an important recovery. So also that point is on the mend. Having said that, I think we should not be complacent. I think that we need to keep a close eye, as you were saying, on the fact that the economic outlook is deteriorating. The interest rate hikes have been positive for banks from the earnings perspective but, of course, looking at the economic value of equity – so the mark-to-market of assets and liabilities – this can have a negative impact on the long-term capital position of the banks, and this is an aspect to which we have asked the banks to pay particular attention. And especially the higher interest rates can imply asset quality problems going forward. So far, there have been no major signals of a deterioration of asset quality. There was a slight uptick in non-performing loans in the second quarter of this year, but still a marginal increase. We see an increase in arrears, which are usually leading indicators in terms of deterioration of asset quality. And we see that in sectors which are particularly sensitive to interest rates, like commercial real estate in particular, the quality of assets has started deteriorating in a sharper way. So we need to continue paying attention to these issues.

We’ve seen a lot of concerns from other regulators about risks and things like private equity, hedge funds and market stresses. Do you think eurozone banks have done enough to mitigate the chance of those risks hurting them?

We have put a lot of attention on counterparty credit risk, which is the main area in which the banking sector comes into contact with highly leveraged non-bank financial institutions. We asked the banks to strengthen their onboarding practices, their monitoring practices especially, which were particularly weak, trying to identify when their counterparts become excessively leveraged, when their counterparts become too concentrated in their exposures, and to be able to stress test these counterparts more effectively. So this is the main area of attention for us. More generally, I would say that the debate is now on the table of the Financial Stability Board (FSB). We should ask ourselves whether the perimeter of regulation should be expanded to cover directly some of these entities or to be a little bit tougher in terms of requirements for those which are already under supervision.

Could you just clarify that? Because that’s very interesting. Are you saying that the ECB should supervise some of these non-bank financial institutions?

No, I’m not saying that the ECB should supervise these institutions. I’m saying that I’ve been very supportive, for a long period of time, of the traditional approach, which was adopted back after the Long-Term Capital Management case. That rather than directly supervising entities outside the banking sector, it was better to strengthen the safeguards at the interface between the banks and non-bank financial institution. What we see now, especially with the development of new technologies and the ability of non-bank financial institutions to start disrupting the value chain in the banking sector – you see that there are entities also providing payment services, for instance, or providing white-label types of solutions that de facto rely on different players to distribute bits and pieces of banks’ products and then manage to avoid de facto supervision, while being a virtual bank when you bring all these activities together. And the other big point is leverage. So, also through synthetic leverage, how much you can control the overall leverage in the financial sector only through the lens of the banking sector. These two are big question marks that I think should be further investigated. And it is not actually a request for more powers for the ECB. I don’t think it would even be possible under the Treaty, which is quite clear in the type of supervisory tasks that can be passed over to the ECB.

I get that, but I mean there are people having conversations around the FSB table about what the best perimeter is. And I guess in some jurisdictions it would require changes to legal mandates. But, setting that aside, do you personally think it would be more effective if the ECB had the power to supervise more than just banks, if you could also do payments or also do some of these other ancillary things that, as you say, are virtual banks? Would that be a good idea?

Again, I don’t see a strong case for the ECB doing it. We would need to investigate this further but it depends which type of activities you bring under the umbrella. The ECB already has a lot on its plate with the supervision of banks. So I don’t think that we should develop an agenda to expand the remit of the ECB beyond banks. The real question is whether the powers and safeguards attributed to the authorities currently responsible for these entities are strong enough.

Just briefly coming back to what you were saying with the monitoring and the onboarding which is now being done around counterparty credit risk and leveraged finance, do you think banks have made enough progress on both the onboarding and the monitoring? Or are there areas where you’d like to see more progress made? And does that concern you?

We sent a “Dear CEO” letter last year and we issued guidance on counterparty credit risk this year. So we gave the banks very clear indications of the areas in which we expect them to make progress. This is coupled with individual recommendations that we made to individual banks in the Supervisory Review and Evaluation Process (SREP). So, definitely, I expect progress to be made as a matter of urgency in the areas which have been identified.

Following on from the March turmoil in the banking sector, primarily in the United States but also Switzerland, and I’m thinking particularly here of the Credit Suisse merger with UBS, we’re now in the process of re-examining the resolution rules and the framework for resolving big banks. What are the lessons you’d take from that recent episode, and are there things that you think would be good to have in the toolbox for regulators broadly, not just the ECB?

First of all, I think there are indications from these cases that the tools that we adopted after the great financial crisis are good: having more loss-absorbing capacity at banks, more capacity to bail in, doing the resolution planning. Even in cases like Credit Suisse, in which the bank was not put under resolution, all the preparation that was done was very useful. The collaboration between authorities, the ability to go to a sort of single point-of-entry international approach to dealing with the bank are all positives. If I look at the issues from a European angle, I think the first point of attention for us is liquidity in resolution. We don’t yet have a framework for the provision of liquidity in resolution. I think that this was very important in the case of Credit Suisse. I think that’s an area where we need to put a serious policy focus going forward. The second, which is very important for me as a supervisor, is that it is clear that we tend to do resolution planning, and maybe also recovery planning, which are focused on a very narrow set of options. Sometimes we need to have more optionality. We need to have more tools. Many of the European banks, for instance, are identified for a resolution strategy based on open bank bail-in. But you see that when the crisis materialises, maybe there could be other tools that could be more effective, for instance the sale of business. So maintaining optionality, I think, would be important. The package that we have now, that the Commission proposed, the crisis management and deposit insurance (CMDI) package, does exactly that. Especially for mid-sized banks, it provides more options for the authorities to solve the crisis. I think that will be very important, and that’s why the ECB is also very supportive. So these, I would say, are the main highlights.

In Credit Suisse’s case there was a state guarantee that came in, and that helped, I think, get the deal with UBS over the line, because with these systemically important global banks, particularly investment banks, it’s difficult for another bank to come in, even one that knows it well, and do due diligence over a weekend. So they need some kind of guarantee from a government to help get a deal done over the course of a weekend. Do you think that that would be useful to have that ability?

It’s a point that could be debated. I think that the moment in which you introduce in legislation the possibility of having a state guarantee, you are bound to use it and then you slip very fast in the direction of deployment of taxpayers’ money to support banks. I think, honestly, that the proof that it cannot be done without a state guarantee is still to be provided. In the case of Credit Suisse there was sufficient loss-absorbing capacity if you went further in bailing in.

If you wanted to use it, I suppose.

Well, in the European Union I don’t think we would have had a choice because legally we cannot go down the route of state guarantees. The only avenue that would have been possible would have been to bail in further, also Tier 2 and total loss-absorbing capacity/minimum requirement for own funds and eligible liabilities type of instruments, to create sufficient capital to also compensate the buyer in the case of a sale of business for potential losses on portfolios which are difficult to perform due diligence on during the weekend.

Do you think that the Swiss authorities handled Credit Suisse’s journey well?

I know how difficult these decisions are, so I trust our colleagues have done the best they could in a very difficult situation. We have not participated in core decisions as Credit Suisse didn’t have large establishments in the banking union, which means we were not part of the core college. A decision that of course we already mentioned in the press release we issued together with the Single Resolution Board and the European Banking Authority (EBA) the day after those events, was the decision of writing down to zero all the Additional Tier 1 instruments while maintaining value on the equity, which I understand was perfectly legal under the Swiss framework but which wouldn’t have been done at the European Union level. That, I think, confused the markets a bit, and we saw that the AT1 market was impaired for a while. Now it is recovering so that’s good news. That’s the only point on which the decision of our Swiss colleagues had some externalities in other markets.

We were talking earlier about the provisioning of loans and how there seems to be a disjoint between provisioning and economic conditions. What do you think of what the United States has done for their Basel end game, where they are getting rid of internal models for loan loss provisions, so they’re taking it away from credit risk altogether? Is that a good move, do you think, in that it takes out some of the lack of consistency in the market if we just get rid of models for credit risk?

It’s difficult for me to comment on the decision of our US colleagues. Of course, in the United States you already had a legal amendment that was introduced, the Collins amendment, that puts a 100% floor on risk weights. So the use of models in the US landscape was already significantly reduced, owing to initial legislative decisions taken at the time of the great financial crisis. After the great financial crisis there was a debate, also in the European Union, whether we should have significantly reduced the scope of models or even dropped models altogether. The decision we have taken has been to repair the model landscape of banks. So in some areas with the Basel final packages, banks will not be able, any more, to use internal models. Operational risk is a clear example where models have not worked well and are now dismantled. In other areas, I think models have not performed that badly and can actually provide better visibility, also for a supervisor, on the internal risk management of the banks. We are pretty severe in our monitoring of internal models. We go on site, we do inspections, we look at the performance of the models. Sometimes we ask for quite harsh changes to the models, which have been very impactful. So it’s quite a strong type of review that we have done of the internal models. And then you have the output floor, which has been introduced as a result of the Basel package. So I’m comfortable with the landing zone for the use of internal models that we have in the banking union.

I’d like to ask you about Russia. It’s 20 months since Russia’s full-scale invasion of Ukraine. Some of the big eurozone banks still have large operations in Russia. What’s the ECB doing about that?

From the very beginning, we asked the banks to significantly review, downsize and possibly exit their business in Russia because we saw a heightened risk in this type of business, not only for the riskiness of the counterparts subject to European and western sanctions, but also because of the impact of the war on the Russian economy. We were also particularly concerned by the difficulty for the parent company in the banking union when it comes to exercising appropriate scrutiny of the internal controls at the subsidiaries in Russia to oversee the business conducted there, especially the payments business, the provision of foreign exchange US dollar and euro payments with customers in the country. This type of pressure had positive effects. The banks moved in the direction we asked them to. We have seen downsizing of the assets, of the overall exposures to Russian counterparts, by 47% since the start of the war. We continue putting pressure on banks to downsize and potentially exit. We acknowledge that there are legal constraints and that, in order to exit the business, you need to find suitable buyers and you need to get an approval from the local authorities in Russia, which is not always easy, but we have also seen some banks that succeeded in doing that. So we keep our pressure high to de-risk the Russian business.

Banking union: do you think we’re ever going to get there?

The first point I want to make is that sometimes there is this impression that the banking union is dysfunctional. I think the banking union is working and we need to put this up front. The elements of the banking union which have been put in place, so the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism, have so far delivered and managed to drive a significant de-risking of the sector, strengthening of capital, cleaning of balance sheets, and I think that we are all in a better position because of that. Of course, the area in which the banking union has not been delivering, and this has been also for me an element of disappointment and personal regret because I hoped I could have done more, is to strengthen the integration of the banking market in the banking union. So what we see is that markets are more and more segmented along national lines. And this, in my view, is an element of risk, because if you have a shock hitting a part of the banking union, the banking sector doesn’t work as it could as a shock absorber by absorbing losses in one country, for instance, through profits in another country. So there is the original problem that was the origin of the start of the banking union, which was the loop between banks and sovereigns that is not yet totally broken. To get there, we have two important steps, I think. One could be done under current legislation, or with minor adjustments to current legislation, and would be to have a more positive attitude towards cross-border banking. We offered a number of options to banks. We suggested to banks, for instance, that they make more use of the instrument of branches instead of subsidiaries. We have seen that the banks relocating from London after Brexit have all basically created a parent company, an intermediate parent undertaking. They merged all their other subsidiaries into the parent company and they are now branching out throughout the banking union. They have no capital or liquidity trapped in individual markets. So we said other banks could do the same. This tool has not been taken up and there are also some minor legal impediments that the Council of the European Union in particular doesn’t seem willing to remove.

Sorry, just to clarify, when you say a more positive attitude to cross-border branching, do you mean from the banks themselves or from the national competent authorities (NCAs) or the Council?

There is a combination here. Nobody is totally off the hook. To some extent, I think that the banks could embrace this objective more. I think that they should experiment and try more tools to integrate their business and consider the banking union really as their domestic market. Sometimes they perceive that there is pushback from the national authorities and they drop the project. I think that this is an element of myopia: on the side of the national authorities that push back, because eventually if you achieve greater integration, every Member State would benefit because you would have a better ability to absorb shocks; and on the side of banks, because they do not think ahead on the banking union and do not contribute sufficiently to make it work at its best. So this is what could be done now: minor adjustments here and there to legislation, more courage on the side of the banking sector and less focus on local capital and liquidity on the side of national authorities. What should be done in the longer term, of course, is the real completion of the banking union with the establishment of the European deposit insurance scheme (EDIS), which is totally mired in a cobweb of red lines by Member States.

Germany, Germany, Germany… well, Italy as well…

I can tell you that there are many Member States, also the host countries – let’s label them like that – that have been pretty vocal in preventing certain types of developments in the banking union discussion. All Member States are setting red lines that make the achievement of the goal more difficult. And I think this is driven by a misperception. Finance ministers think that if they move to EDIS, they are de facto underwriting a joint and several guarantee on something close to €8 trillion of insured deposits. In reality, if you have an effective deposit guarantee scheme, like you have in the Federal Deposit Insurance Corporation (FDIC) in the United States, you deploy this money on a least-cost basis and eventually the banks themselves replenish it. So if the system works as efficiently as it should, eventually you don’t need to activate the fiscal backstop. So it’s unfortunately this misperception that keeps blocking the passage to the completion of the banking union, and that’s really something that I hope will be addressed in the next legislature.

You don’t sound massively optimistic. But let me just ask you whether this actually means that consumers in the eurozone are losing out as a result of this blockage, because we’ve seen with the higher interest rates that banks have been very slow to pass that on to consumers. If the eurozone single market was working well in the banking sector and the banking union had been completed, surely there would be much more cross-border competition that would then make banks more likely to pass on these higher interest rates to consumers, wouldn’t it? You’d have more of a competitive market.

There would be benefits for everybody. As you correctly say, if you have more competition, if you have a more integrated market, that will be much more beneficial for customers of banks, both depositors and borrowers. Because if you have a market which is heavily concentrated on the asset side, of course the pricing power of the banks increases significantly. So a more integrated market, where you have more competition, eventually benefits the users of banking services: depositors and borrowers as well. Most importantly, if you have a shock, you can manage to withstand the shock much better, instead of entering into a sort of spin and having the real economy suffer, which means jobs and growth suffering locally, as we saw very well during the sovereign debt crisis and we brought the scars of that period with us for a long time. The other point is: how can you have a banking union or even a monetary union if a deposit in Cyprus is not worth the same as a deposit in Helsinki? Ultimately, the value of the deposit depends on the strength of the safety net that guarantees that deposit.

Can I ask about one other element that banks sometimes raise to me, which is the fact that while there is a single supervisor from a prudential perspective, the NCAs still handle conduct, which then leads to a kind of patchwork of administration. So is there a role for a pan-eurozone conduct regulator, rather than leaving the NCAs to do different things themselves on conduct?

I would move to more European arrangements in a number of areas, but I think we should put first things first. For me, the first priority now is to have a banking union which works properly. And now I think there might be this impression, also on the side of governments, that as we have been effective in these first almost ten years of our existence, there is no need to do anything more, while we maintain this sort of fault line in our institutional arrangements in terms of integration and in terms of a safety net. That’s the main issue that I think we should fix. The CMDI package goes a long way towards addressing it. EDIS will go all the way in addressing it. For the conduct issues, my personal view, is that it is difficult. I think it is proving difficult to have an effective capital markets union, for instance, without having an authority empowered to deliver the objectives of that capital markets union. I’ve seen the difference, also moving from the EBA to the ECB. The difference between having the power to promote integration only with the regulatory tool and the effectiveness of also having the supervisory lever in your hands to deliver that integration and that effectiveness.

So you would like to see conduct ultimately, in an ideal world… I’m just making sure that I’m understanding that.

Personally, I think that if you want a capital markets union you need to make bolder steps also in the direction of integration of supervision on the conduct side, yes.

Can I ask about the European Court of Auditors and their recent report? They don’t do regular reports on the supervisory function of the ECB, but they did one recently which was quite critical. It was backward-looking mostly, but what’s your response to that? I know the SSM has issued a response to it, but do you think that they made some points that were valid?

Of course. First of all, you said the European Court of Auditors is making a lot of reports on the ECB. Actually…

No, I said they don’t.

Exactly. When I joined, there was basically a position at the ECB which was a bit hostile towards having the Court of Auditors review our supervisory task, because in the Treaty the ECB has a lot of protection that enables the Court of Auditors to do checks only on the efficiency of the ECB but not, due to the independence of the ECB, on the policies. As a supervisor, I do want to be accountable. I think it would be wrong not to have the European Court of Auditors look at how we perform our tasks, and that’s why we signed a Memorandum of Understanding with the European Court of Auditors and we opened our books. And I’m proud of that decision. So it’s fine that they come and fine that they criticise us. That’s part of the game, so I’m not concerned about that. They did several reports. The one that you mentioned on the management of supervision of non-performing loans was positive in its general tone and was critical on some issues. I think some criticisms were very well grounded, and we are following up on that. They criticised the efficiency of our processes, the excessively long SREP. On all these issues we took their comments very seriously, and they also chime with the comments made by the independent group that I also asked to review our SREP, and we are trying to follow up on that as well. So we are trying to take all these comments seriously and to follow up. There is only one comment on which we were actually not in agreement. Basically, what they said is that we should have more mechanistically applied the add-ons on under-provisioning of non-performing loans, raising the capital bar for the banks that were stuck with a lot of legacy issues. I understand their point here, but I think that the policy we followed was very pragmatic and eventually effective, because in order to deal with non-performing loans effectively, banks need to take a capital hit. So if you raise the capital bar, they have less capital space to actually sell or securitise non-performing loans with a loss. So we calibrated the requirements in such a way as to maximise the speed of adjustment that was sustainable.

If you had increased the capital requirements as much as you could have done, it would have reduced their ability to actually deal with the problem.

Exactly, so they would have been less fast, in my view, and less effective in reducing the amount of non-performing loans. And seeing now that also the banks in Greece for instance have managed to turn the corner and significantly reduce their non-performing loan ratios, some of them to reimburse the capital injections made by the Hellenic Financial Stability Fund, this shows that eventually that policy paid off.

Just on non-performing loans, Italy’s done something unusual, which is to introduce this law that allows people to buy back their non-performing loans.

No, that’s not a law yet.

A proposal.

There have been some suggestions that I’ve seen floated. I’m not sure there has been follow-up to these suggestions.

Is the ECB active on this?

A blog post published by Elizabeth McCaul and Korbinian Ibel expresses concerns on similar initiatives, also in other countries. Sometimes there is this laudable objective, which I fully understand from the policy point of view, to protect the borrowers who have been suffering from a crisis and want to find solutions to their excessive indebtedness issues. The problem is that if, in taking measures in that space, you damage the secondary market for non-performing loans, you reduce the liquidity, the efficiency of that market and the willingness of specialised investors to invest in that market, and then you significantly reduce the ability to address non-performing loan issues in the future. And this is to the detriment of today’s customers, because the banks, if they know that they won’t be able to dispose of non-performing loans tomorrow, will price in a higher risk today. And this means that loans will be more expensive and current customers will suffer. So I think that we need to be very careful with initiatives in those areas. They need to be very carefully pondered, also considering the impact on the secondary market for non-performing loans.

I’ve got one more question, which is a kind of big-picture question. You’ve had a senior role in overseeing Europe’s banking system in particular for the past decade. What do you think is the biggest achievement that you’ve made, and what do you think is the biggest risk that’s confronting the sector in the next few years? What do you think is the number one risk that you would highlight for your successor to watch for and be wary of?

The biggest achievement, as I already mentioned, is balance sheet repair. That was, I think, an important achievement. If I have to say the achievement in terms of European supervision, if you take a snapshot of our organisation, which is the ECB plus 21 NCAs, and our procedures, we are a very complex organisation. Our manuals, our procedures – banks complain that it’s all very cumbersome. Still, we had an unprecedented sequence of shocks: a pandemic, the Russian invasion of Ukraine, the return of inflation with an unprecedented fast change in interest rate environments and the crisis during the spring in the United States and in Switzerland. And I think that we have been very agile, surprisingly agile, for such a complex organisation in terms of shifting to the risk du jour and trying to apply pressure, communicating with the markets and trying to give clear indications. I think the relaxation of buffers during the pandemic, the shift to sectoral analysis and the recommendation on dividends and distributions were all very fast reactions to a rapidly changing external environment. So I’m particularly proud of that – that this organisation is able to move so fast to be more risk-focused and to be effective. On the risks, I already mentioned the issue of integration, which I think is a fault line. What I would say is high on my mind right now is that what I saw during the spring really scared me. Because you see that if there is a moment of market turmoil, you have global investors going to the next weak link. They intervene quite strongly on credit default swap (CDS) markets and equity markets, taking short positions. And this has an immediate negative impact on the behaviour of institutional and corporate treasurers in terms of deposits. The sharp decline in equity prices and the increase in CDS spreads immediately drive uninsured depositors’ withdrawals, entering into a strong loop. So I think that, from the supervisory perspective, we need to put a lot of attention on these types of dynamics, look at the funding and liquidity risk of banks much more than we have done in the past and be very forceful, maybe also to repair, faster than we have done so far, the weaknesses in business models and governance because these are the drivers that attract the attacks from investors.

It was particularly that Friday with Deutsche Bank, wasn’t it? That was a pretty scary moment, I imagine.

My point is more general. The point is that I don’t think anybody had on their radar screen the fact that you can have a moment of nervousness in the market that drives stock prices and CDS spreads into negative territory and then has such a massive impact on deposit outflows. That was not on anybody’s radar screen to be honest. And I think that we should not get too relaxed about that. We should really dig into the issue irrespective of the banks. I think it’s something that cuts across systems, so it’s not a European issue. It’s an issue that was in the Basel Committee’s report on the spring turmoil. I would recommend that my successor keeps a close eye on this.

We haven’t asked you about Brexit at all. Maybe one way to bring it to the current day is this bonus cap being repealed in the United Kingdom. Does that worry you that you could see banks shifting more of their capital markets operations back to the United Kingdom, where they will have more freedom on bonuses?

I don’t think this will be the case. We have been very clear to banks after this desk-mapping review, giving indications of what our expectations are in terms of risk management, strategic capabilities in place in the European business. I’ve been very careful in framing this work to have close collaboration with the UK authorities and the Federal Reserve, precisely because I didn’t want the banks to receive conflicting indications from different authorities. So we are all on the same page. Now it’s time to implement, and I don’t see the decisions that the United Kingdom has taken on bonuses interfering with this direction of travel.


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