Interview with Bloomberg

Interview with Claudia Buch, Chair of the Supervisory Board of the ECB, conducted by Nicholas Comfort and Laura Noonan on 9 April 2025

11 April 2025

What are you hoping to get from your conversations at the IMF Spring Meetings in Washington, DC this month?

We’re all trying to understand what’s currently happening around us. We have done our first analysis, but I think it’s early days and we need to see what the new tariff announcements, and the response measures, mean for valuations and the real economy. We cooperate with all our international colleagues, and this is clearly also a place where we meet and discuss with the US colleagues, with whom we have very good relationships. I’m very confident that we’ll also keep up those good relationships because what’s really needed in these days where we have a lot of uncertainty is good international cooperation, a stable international framework.

How do you see risks from a fragmentation of global policymaking and what should banks be doing?

It’s crucial that we have an international framework, an international level playing field, for globally active banks. It’s also the banks that are not necessarily active globally that benefit a lot from it because it gives stability to the system. When we speak to other supervisors, they clearly see the same benefit. Having a good stable international framework also benefits the banks quite a bit. So I think we have a very good business case here for continuing with this international cooperation.

Do current market events underscore the need for that?

I would hope that we don’t have to have difficult situations on markets to convince people that we need a stable and reliable framework. But clearly the events that we’re seeing now and also the turmoil on international banking markets in March 2023, with no spillovers really to banks in the EU, show the importance of having a good stable framework and good supervision. The silver lining, clearly, is that we can show very convincingly how important a stable, resilient financial system is not just for itself, but also for the real economy. We come out of a period of ten years where we did have shocks hitting the real economy. These certainly weren’t easy years. But we also had financial stability over this period. We always need to remind ourselves that this is not a given. It depends on strong regulation and good supervision. We shouldn’t give that up in this environment.

How does this situation compare to previous crises?

In terms of the overall institutional framework, we are in a much better position than we were ten, 15 years ago. That gives me confidence, also in terms of the cooperation within the system, that we are better prepared. Of course, we also have gaps in the banking union framework, we miss a European deposit insurance scheme, the third pillar of the banking union, and the crisis management framework needs to be improved. But I think we really need to acknowledge the progress that has been made. That makes me confident, given all the uncertainty around us, that we can also deal with future stress issues that we are not seeing yet. We've seen a relatively orderly market adjustment, and the banks are liquid and well-capitalised right now.

How have banks fared in the storm over the last few days and what indicators are you looking at?

What you look at is how market prices are evolving and we're certainly seeing a repricing of risk. The markets have to find out what the right valuation of assets is across the globe. When you look at how bank share prices are performing, we don't really see a big differentiation between jurisdictions. We must also say that, of course, bank shares had increased quite a bit in recent months. So there's some correction there. One of the first things we monitor as supervisors is liquidity. The indicators that we're looking at now are really business as usual. So we would always look at liquidity indicators. Since 2023 we have had weekly liquidity monitoring. This benefits us a lot now. So far, we don't see any signs of liquidity stress in the markets. We have seen some increasing margin calls which are being met. But as far as I read the evidence, we don't really see major vulnerabilities being exposed that could then have a negative impact on the banks. But it remains to be seen how things evolve.

So the banks are able to contend with this stress?

We've seen adjustments of markets to the news. This is quite normal. But we haven't really seen a big impact on the banks so far.

What do you think about credit risk from the tariffs?

Until a month ago there was lots of uncertainty about what would happen. Now we have some more information, but still a lot of uncertainty. We've been working with the banks for some time now so that they have sufficiently granular information on their credit portfolios to assess this type of risk. If you think about non-performing loans, we don't see the impact of the higher tariffs yet. It takes time for that impact to filter through the real economy.

Could this turn into a financial crisis?

Our job is to keep banks sound and safe, to make sure that we have sufficient buffers in the system. We also have a resolution regime. The framework that we've put into place with prudential requirements, strengthening the framework after the great financial crisis, with good sound supervision in place, is there to reduce the probability and the severity of a financial crisis.

Speaking of buffers, will the ECB instruct banks to conserve capital and not pay out dividends, as your predecessor did in the pandemic?

The situation under COVID and the ECB’s dividend recommendation was different because it was a very unexpected shock. At the time there was also a lot of uncertainty as to how the fiscal measures that were put into place would play out. The recommendation was not that banks couldn’t pay dividends, but to postpone dividends until that uncertainty had been resolved. Now we’re in normal practice, we assess banks’ distribution plans over a medium-term time horizon. In the end it's for the banks and their shareholders to decide how much of their profits they want to use for distributions, how much they want to retain earnings, how much they want to invest in their long-term business model. We are clearly in a different situation now than we were under COVID. We are now in the business as usual of monitoring banks’ distribution plans.

Just to be 100% clear, you’re ruling out a repeat of the recommendation to stop dividends?

We are now in the normal process of monitoring banks’ distribution plans.

How will the events around tariffs feed into the debate about the competitiveness of the European economy and financial sector?

The best thing we can do to support the competitiveness of Europe and European corporations is to have a stable and resilient financial system. What we are seeing around us right now is really a confirmation that we need resilience in the system. The system needs to be able to deal with unexpected developments. We should certainly not weaken supervisory and regulatory standards.

Having said this, there are a lot of ways we can improve the way we do supervision. We’ve started a big reform of our supervision precisely to become more effective and more efficient. That’s affecting all our supervisory procedures. We are now looking into what more we can do to become even more efficient. And we are very open to discussions if others have more ideas about what can be done to streamline, to simplify. That’s all fine and good under two conditions: not weakening resilience, and ensuring that whatever is done is subject to a good cost-benefit analysis and impact assessment.

Coming back to the tariffs situation, does it feel like we’re back in crisis time? Are people putting in 12, 14 hour days, staffing round the weekend, etc.?

Of course everybody who’s looking at market developments does so more intensively than in a very quiet period. But other than that, we have our frameworks in place, our people are regularly in contact with the banks. We are very vigilant.

Are you satisfied that the ECB’s work on leveraged finance achieved its aims?

Let’s recall the aim of this activity. We’ve seen quite a big increase in leveraged finance in Europe. It’s also relatively risky. Based on the guidelines that we have, it was very useful to look into this activity more and to really understand what’s going on in the banks. Overall, I’m quite satisfied with the progress that we have made. Now it’s up to the Joint Supervisory Teams to see what the exact follow up is for each bank. This is still ongoing.

Some banks were unhappy with how the review was carried out. Were there any lessons learned at the ECB?

I’ve also heard those criticisms. We take all these concerns very seriously. I don’t see that the setup of the process was fundamentally different. It was like we always do with these types of activities. But this is also part of our routine process – whenever we hear criticism, we look at what we’ve done and we see whether there are any lessons to be learned.

You are updating your guide to internal models. Will you ask banks to use a longer time series in order to include data from periods where loan quality deteriorated? Will you also address the bottleneck in model approval?

The guidelines need an update because the Capital Requirements Regulation is changing a few issues that are relevant for internal models. Then there are also issues around how AI can be used in internal models. The banks would need some clarity here. As regards the bottlenecks, we would like to see a simplification of the model landscape because the internal models tie up quite a lot of our resources. Most of the model investigations we do are at the request of the banks. A streamlined model landscape with fewer satellite models would benefit everybody. The length of the time series is also absolutely crucial. The banks should understand that if they want to have a reliable model, they need to have a sufficiently long time series that captures a period that is representative of good and bad times.

Given how complex some of the internal models are under the Fundamental Review of the Trading Book (FRTB) rules, do you have any advice for banks on whether they should continue to use advanced models so widely?

It’s for them to decide. They need to weigh the resources that go into maintaining the model versus the benefits they get from it. But we don’t give any particular advice there.

How closely are you following the European Commission’s consultation on changes to the FRTB?

In the end, the introduction of the FRTB is a political decision. The FRTB deals with market risk. This brings us to the discussion we had at the beginning – market risk is not something that we can ignore. It’s important to have good standards there.

What do you consider to be in line with the spirit and letter of the law on the Danish Compromise, and what isn’t?

Our interpretation is that it’s intended to be applied to the insurance sector and not to, for example, asset management undertakings. As a supervisory authority, we grant supervisory permissions for the application of the Danish Compromise on a case-by-case basis. But let me remind you that we are not the rule-makers. This is the role of the European legislators and the European Banking Authority as drafter of technical standards. The ECB ensures that credit institutions comply with the applicable rules of the prudential framework.

Do you favour the idea of a defence supporting factor like with the SME supporting factor?

Prudential regulation serves a purpose – keeping banks safe. I’m not the rule-maker, but from a supervisory perspective, I caution or even warn against linking prudential objectives with other policy objectives. There’s a good reason why we have a division of labour between different policy areas. And what you mentioned is to kind of bring in other policy objectives like climate or defence. I haven’t seen any proposals being tabled, but I think it would be very difficult to bring other policy objectives into the prudential regulatory framework.

Is there anything inherently wrong with banks being used to fund defence?

We don’t look at the banks in terms of which sectors they should provide funding for. Our perspective is always the prudential perspective. Are the risks that the banks take with funding certain industries well managed? Are the banks sufficiently capitalised? We don’t have another policy objective. There can be other policy objectives, also other instruments being used by policymakers related to bank lending. But we always look at banks’ activities through the prudential lens.