Regular Hearing of the Chair of the ECB’s Supervisory Board at the European Parliament’s Economic and Monetary Affairs Committee
Introductory remarks by Danièle Nouy, Chair of the Supervisory Board of the ECB,
Brussels, 3 November 2014
Honourable Members of Parliament,
I am very pleased to be here before you, literally on the day before the ECB assumes its supervisory role. The decisions of the European Parliament and the EU Council a year ago allowed the ECB to intensify its preparatory work for the Single Supervisory Mechanism (SSM). All of this work will come to fruition tomorrow. It is therefore very appropriate that I inform you, the representatives of the European people, who hold the SSM accountable, on the progress we have made to get to this point.
The past year has been one of the most challenging in the history of the ECB. One of the main reasons why we are ready to assume our supervisory tasks is because of the successful completion of the comprehensive assessment. It was a thorough health check of the banking system, which warrants paying tribute to the thousands of supervisors and auditors that were engaged in the exercise. The comprehensive assessment has given the SSM extensive granular information that it will use to push ahead with effective supervision in the years to come. Furthermore, a considerable amount of information has also been released to the public. This degree of transparency is an important element in enhancing the confidence of investors in the European banking system.
In parallel with the comprehensive assessment, we conducted the necessary preparatory work for the SSM. This is reflected in the quarterly reports we have been submitting to you since last November. The fourth and last SSM Quarterly Report was made available to you today. Taken together, the quarterly reports demonstrate that the ECB has established the necessary operational capabilities for its supervisory tasks. Thus, I am indeed pleased to confirm to you today that we are ready to take on the responsibility for the single supervision of the euro area banks.
For this, Parliament itself deserves praise. You, the co-legislators, have played a key role in developing an ambitious banking union that makes the banking system safer. A banking union that ensures that the banking system can once again effectively finance the economy and thereby create the growth that is necessary to reduce unacceptably high levels of unemployment.
Let me now turn to the detailed results of the comprehensive assessment, which we published last week. I will then go over the latest elements in the preparatory work of the SSM.
The results of the comprehensive assessment
The public disclosure of the results of the comprehensive assessment on 26 October was a major milestone in the establishment of the new supervisory regime in the euro area.
The significant institutions that will be subject to the direct supervision of the ECB have gained an initial insight into how it will be conducted: independently, in a rigorous fashion and consistently; ensuring high supervisory standards across the SSM.
The conduct of this exercise has created a solid and credible basis for the future cooperation with national competent authorities, which is a key element for an effective supervision of the SSM.
Finally, work on the comprehensive assessment within the ECB has advanced extensive cooperation across the organisational units in charge of supervision, fostering a strong team spirit among all the staff involved.
Let me now take you through the findings and results of the comprehensive assessment. My message is twofold: first, the assessment achieved its objectives. And second, the identified capital shortfalls need to be addressed appropriately.
The scope of the comprehensive assessment was unprecedented. In total, 130 banks participated in the exercise. They hold assets worth €22 trillion, accounting for over 80% of total banking assets in the euro area. Under the oversight of the ECB, over 6,000 experts from National Competent Authorities and third parties contributed to the comprehensive assessment.
The exercise has substantially increased transparency on the underlying quality of the banks’ assets. A detailed review was performed for over 800 specific portfolios. More than 119,000 borrowers were analysed in depth. The exercise made banks comparable across national borders through the uniform application of a detailed methodology, including a harmonised definition of non-performing exposures.
The asset quality review (AQR) resulted in an aggregate gross impact of 47.5 billion euroon participating banks’ asset carrying values as of 31 December 2013. These adjustments originated primarily from accrual accounted assets, particularly adjustments to specific provisions on non-retail exposures. In total, 136 billion euro of new non-performing exposures were identified. On combining the AQR with the adverse scenario of the stress test, the comprehensive assessment results in a theoretical capital depletion of 263 billion euro over a three-year horizon.
The comprehensive assessment identified a capital shortfall of 24.6 billion euro across 25 participating banks. However, 12 banks have already covered the shortfall through issuance of new capital in 2014. The remaining banks with a capital shortfall must present capital plans by 10 November. They need to outline how they intend to improve their capital position within the next six to nine months. Capital shortfalls should be covered by private sources; only in cases where this is not possible would the question of the public backstops arise. The state aid rules would then apply, requiring, as a minimum, burden sharing by shareholders and junior creditors. Having said that, I am confident that the banks can meet their shortfalls through internal measures and by accessing the financial markets. The comprehensive assessment will therefore contribute to banks’ balance sheet repair and will in turn promote the return of confidence in the European banking system.
The comprehensive assessment has been widely received as a credible exercise. Anyone under the impression that the overall amount of bank capitalisation needed is small, should be made aware that, even before its conclusion, the assessment caused the banks to anticipate improvements in their capital position. The frontloading of capital strengthening measures by the banks has amounted to more than 200 billion euro since July 2013.
The ECB is ready to take up its supervisory tasks
Let me now turn to our other preparations. In parallel to the comprehensive assessment, the ECB has completed its intensive preparatory work on the legal and operational infrastructures of the SSM.
Critical legal acts that will govern SSM operations were adopted over the past few months: the Decision on separation between the ECB’s monetary policy and supervision function, and the Regulation on supervisory fees. Furthermore, in early 2015, we expect to adopt the Regulation on supervisory reporting, for which we have launched a public consultation on 23 October.
In September, we published the Guide to banking supervision, in order to share the key elements and drivers of the SSM’s supervisory model with the supervised entities and the broader public. We designed the SSM model, drawing on the best supervisory practices available among our members, to harmonise national approaches and to ensure a higher level of consistency. At the same time, our horizontal functions will continue to make use of SSM’s multinational DNA in order to refine the supervisory model further. Nothing reflects this multinational effort better than the innovative structure and the operating principles of our Joint Supervisory Teams, drawn from staff of the ECB and the National Competent Authorities, which embody the spirit of the SSM.
In order to deal with the large-scale preparatory work and our prospective institutional tasks, we have thus far hired and mobilised 900 staff, within the supervisory DGs and in support services across the ECB. Our recruiters have received approximately 21,000 applications for jobs in the supervisory functions, and 3,000 for support functions. As some of the newly hired staff will take up their duties at a later date, and as we finalize pending recruitment campaigns by the end of November, we are gradually moving toward a fully staffed SSM.
In 2013, when we designed the comprehensive assessment exercise and began, simultaneously, to establish the supervisory structure, reaching our goals was not a foregone conclusion. Therefore, my expression of gratitude, also on behalf of the Supervisory Board, goes to hundreds of staff members, professionals and managers at the ECB and at the National Competent Authorities, all of whom have worked relentlessly for months to enable the SSM to be launched tomorrow, as scheduled. We are ready to take on our tasks. As is rightly expected of us, we will be tough and intrusive but even-handed, accountable but independent.
In this regard, I should recall that our supervisory mandate entails robust accountability, as is reflected in the SSM Regulation, in the Interinstitutional Agreement with the Parliament and in the Memorandum of Understanding with the EU Council. This framework is perhaps one of the most far-reaching that is in place for an independent central bank that is responsible for supervision. I believe we have already lived up to the word and spirit of this framework.
In conclusion, I would like to reiterate two main messages:
Progress towards establishing the banking union has been made very rapidly. Just over two years since the European Council decided to go ahead with the banking union, we have completed the comprehensive assessment exercise, the ECB is fully ready to take on banking supervision and the preparatory work on the Single Resolution Mechanism has advanced significantly. The SSM and the Single Resolution Mechanism are essential pillars for a more robust and resilient framework to help prevent problems from occurring, and to intervene and ultimately resolve banks if needed. This should also help to contribute to the integration of European financial markets.
However, there is no room for complacency.
First, we need to complete the recapitalisation of those banks in which the comprehensive assessment has uncovered shortfalls.
Second, Member States need to deliver on the commitment to establish an appropriate borrowing capacity for the Single Resolution Fund; but the Fund will pay back loans it has taken up for purposes of additional resolution financing. It should be clear that taxpayers will not foot the bill.
Third, the banking union will only be complete once we have a truly level playing field for all financial institutions within the European Union, meaning harmonised regulation, implemented in a consistent fashion, thanks to the single rulebook of the European Banking Authority. In this regard, we rely on the European Banking Authority, the Commission and, of course, on you, the legislators, to continue to play your constructive role in creating a single financial market in the EU.
Thank you very much for your attention. I look forward to answering your questions.