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Andrea Enria
Chair of the Supervisory Board of the ECB
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“A race car camouflaged as a tanker”

Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, Supervision Newsletter

15 November 2023

You have been Chair of the ECB’s Supervisory Board for the past five years. Would you compare the experience to steering a tanker or a race car?

I think it’s a race car camouflaged as a tanker. Our processes are rather burdensome, our methodologies are complex and the collaboration with national competent authorities, which is essential for our machine to work, requires a lot of coordination with bodies where everybody is represented. Yet, when needed, we are able to rapidly change gear and become extremely focused and agile. We proved this in our fast response to the pandemic, and then again in the effective refocusing of our supervisory work immediately after the Russian invasion of Ukraine and the comeback of inflation. Definitely a race car.

Discussions between banks and supervisors can often get quite tense – like when you recommended restricting dividend payouts at the outset of the pandemic. Is friction part of the game?

Of course, it is better when bank management shares our assessment and acts on the suggestions from our supervisory teams, because in this way the weaknesses we identify can be swiftly remedied. But there are bound to be situations where our recommendations are not well received by the banks. It is part of our job to ask banks to do things they would prefer not to do. You mention the recommendation on distributions during the pandemic – actually, I think that at the time many banks welcomed this recommendation, because they saw the huge potential risks ahead but were wary of proposing restrictions to their shareholders themselves. Friction tends to be most intense when we raise concerns on governance and the sustainability of banks’ business models, as banks feel these areas should be their exclusive responsibility. But the fact that all the banks that have failed recently had weaknesses in those areas carries clear prudential implications and it is our duty to intervene.

In 2022 you asked an independent group of experts to assess the Supervisory Review and Evaluation Process (SREP). What prompted this decision, and when and how will the group’s recommendations be implemented?

I have always been convinced that organisations thrive when they have a good internal debate and an effective system of checks and balances. We had already started an internal discussion on the SREP, on how to make it more risk-focused, more effective and less burdensome. I thought that having an additional external, independent view could help us in this process. Also, there were points that had proven quite divisive in Supervisory Board discussions, and the search for compromise had led to complex methodological solutions that left all parties somewhat dissatisfied. An independent review could help us find a common way forward and think outside the box.

A large number of the recommendations are already being incorporated in the SREP. We introduced a risk tolerance framework, which empowers Joint Supervisory Teams (JSTs) to choose their priorities to ensure progress at the bank they are responsible for. We launched the multi-year assessment, which enables JSTs to plan the SREP over a longer time horizon, instead of assessing all risk profiles every year. A few areas will require further work, for instance the methodology for calibrating scores and capital requirements. Finally, some suggestions will be taken up in the longer term, such as the use of artificial intelligence in data analytics for supervisory purposes.

For a long time, capital requirements were the supervisors’ top choice to push for change in banks. However, the independent experts criticised European banking supervision for being overly reliant on capital measures as many areas, such as sticky governance issues, are hard to quantify. What is your view on qualitative measures?

To be perfectly clear, the experts did not conclude that the capital requirements applied by the ECB were too high and should be lowered. They considered the overall calibration to be broadly correct. Also, I believe that in the first phase of the banking union the main priority was to complete the post-crisis repair of bank balance sheets – strengthen their capital position and improve asset quality. I am convinced that the capital lever was the right tool for this purpose, and I don’t think the experts are challenging this. What they said is that now that we are moving to a more mature stage and the banks have repaired their balance sheets, we need to make more use of other instruments in our toolbox. “What got you here won’t get you there”, to use their words. I very much agree with their assessment. There is now a strong consensus in the Supervisory Board that we need to make greater use of qualitative measures and escalate to enforcement action in key areas when banks do not ensure an adequate and timely implementation. This is also an important lesson of the spring turmoil in the United States, as also reflected in the very candid reports from our colleagues at the Federal Reserve and Federal Deposit Insurance Corporation.

You mentioned the new risk tolerance framework and the multi-year SREP assessment as areas in which ECB Banking Supervision is changing its annual supervisory check-up. What’s in it for the banks?

When I joined the ECB, several banks voiced concern that in our SREP we were sending them a long list of findings and measures without a clear indication of what really mattered, of what they really needed to do to improve their scores and, ideally, have their capital charges reduced. Also, they frequently complained that our procedures were excessively burdensome. The risk tolerance framework and the multi-year assessment will support a sharper, more selective risk focus in our assessment and reduce the box-ticking dimension of our methodologies. The result should be clearer incentives and lower administrative burden.

You described the banking turmoil in the United States and Switzerland earlier this year as one of the scariest moments during your tenure. What were the biggest lessons for you from these incidents?

The first lesson is that we as supervisors need to make a greater effort to understand and anticipate market dynamics under stress. In good times, supervisors and market participants look at a very similar set of balance sheet and profit and loss indicators to assess the state of a bank’s health. At times of turmoil, however, investors shift to a mark-to-market view of the banks. This could lead to very fast corrections in credit default swap spreads and equity prices of the banks that are perceived as weak, which in turn triggers equally fast withdrawals of uninsured deposits. We need to prepare in advance, monitoring market valuations closely and making sure that banks have well-diversified and resilient funding structures and are able to easily tap central bank liquidity facilities at times of stress.

The second lesson is that we need to more effectively push for remediation when we identify major shortcomings. We too have findings that remain open for a long time. If the weaknesses we have identified are serious enough, we need to be more forceful in requiring banks to address our concerns within a clear time frame.

Do you think European banking supervision is missing any key tools that could have helped you navigate the past five years better?

I think we have a comprehensive toolbox at our disposal and we need to consider how to use it better ourselves. But there are areas where the framework could be strengthened. The most delicate one is crisis management. Having a strong framework that can support failing banks in smoothly exiting the market is very important to us, as we are responsible for assessing whether or not a bank is failing or likely to fail. The European Commission put forward an important proposal to improve the framework for crisis management and deposit insurance. It would give authorities more flexibility and optionality in managing crises of mid-sized banks, with an expanded scope for resolution and greater possibilities to use deposit guarantee schemes as tools for funding potential solutions on a least-cost basis. It is not the reform that we need to complete the banking union – that would be the establishment of a European deposit insurance scheme. But it would make our life easier. Together with the Single Resolution Board we succeeded in managing the crisis of Sberbank after the Russian invasion of Ukraine, but it wasn’t easy in the current framework.

You have voiced frustration about the lack of progress in banking integration and consolidation in Europe. What would need to happen, say, in the next five years for any advancement on this front?

I really hope that in the next five years there will be material progress towards the completion of the banking union, which would remove the last element that still keeps banks linked to their sovereigns – the national scope of deposit guarantees schemes. But I also hope that banks will make greater use of the options available under the current framework to better integrate the market. We have made it clear that we would assess cross-border mergers within the banking union exactly in the same way as we would domestic mergers. We have announced that we are open to considering applications for cross-border liquidity waivers, which are already possible today and would enable a greater pooling of liquidity at group level within the banking union. And we have suggested that banks consider a greater use of branches, also transforming existing subsidiaries into branches, as a way to avoid abiding by capital and liquidity requirements in every Member State. As banks become more profitable and market valuations improve, these options may become more attractive and we may see a greater push for integration coming from the industry.


Europese Centrale Bank

Directoraat-generaal Communicatie

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