First ordinary hearing in 2015 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, 25 June 2015

Mr Chairman,

Honourable Members of Parliament,

Introduction

It is my pleasure to be back in ECON. In my introductory remarks, I will give you a round-up of the situation in the banking sector supervised by the Single Supervisory Mechanism and touch on our current projects. I will then discuss the topics you have asked me to address, namely, capital requirements for banks and the Supervisory Review and Evaluation Process, as well as the Analytical Credit Dataset or AnaCredit. I will also briefly touch on our cooperation with the Single Resolution Board.

State of play:

Banking sector

Let me start with an overview of the banking sector. Euro area banks have continued to make progress in tackling legacy issues from the financial crisis, while adapting to an evolving regulatory and operating environment. The comprehensive assessment has brought much-needed transparency and showed that the banking sector is well equipped to withstand the most plausible adverse shocks. However, at least two sizable challenges remain.

First, euro area banks are struggling with a relatively weak profitability. This is mainly due to the still fragile and uneven economic recovery, as well as the low interest rate environment which puts pressure on net interest margins. While there are signs that the situation is improving, some further adjustments in business models may be needed.

A second challenge relates to the large stock of problem assets in some banks which adversely affects banks’ lending capacity. This is particularly pressing for banks exposed to a more vulnerable local economic environment. The resolution of non-performing loan problems requires a comprehensive approach but there is no one-size-fits-all solution, as the origins of this problem are related to different causes, including general economic conditions, poor banking practices, weak legal frameworks for debt recovery, and a lack of capacity in judiciary systems. Some of these causes go beyond the mandate of the SSM.

Overall, weak profitability and the large stock of legacy problem assets continue to weigh on banks’ capacity to simultaneously build up capital buffers and provide credit to the real economy.

Key projects and decisions in the Supervisory Board

Let me now move to a presentation of the key SSM projects and decisions since my last appearance in March.

Back in March, I mentioned that the setting-up process of the SSM had been successfully completed. We have nevertheless some way to go to reach a steady state and we are gaining experience every single day. Some things will simply take time, like developing a “common supervisory culture” within the SSM. This will be a daily effort which I am confident will yield the desired result over time.

Against this background, we have undertaken a half-year review of our supervisory priorities to ensure they continue to be up to date, taking into account recent developments and our assessment of the key risks going forward. These developments notably comprise the necessary adjustments to meet BRRD, MREL and TLAC requirements; the quality of banks’ capital, in particular in relation to deferred tax assets and tax credits as well as the uncertainty regarding the prolonged low interest rate environment. We have thus slightly adapted the Supervisory Priorities for 2015 which will continue to be reflected in supervisory actions.

Capital requirements and SREP

Follow-up of Comprehensive Assessment

I will now turn to the first two topics you had proposed for this hearing, capital requirements and the Supervisory Review and Evaluation Process or SREP. One important perspective on capital requirements is to look at banks which exhibited a capital shortfall in the Comprehensive Assessment.

To recall, the Comprehensive Assessment exercise identified capital shortfalls for 25 banks, totalling €24.6 billion. In the course of 2014, banks raised € 18.6 billion of new capital. As a consequence, some banks had already solved their capital shortfalls before the publication of the results of the Comprehensive Assessment in October 2014. Furthermore, banks were required to cover their capital shortfalls within six months or nine months after the publication of the results. At the beginning of June 2015, most of the banks had covered their capital shortfalls and the remaining are in the process of fulfilling their capital plan before the established deadline.

SREP

Let me turn to the Supervisory Review and Evaluation Process, which, as you know, determines for each bank the institution-specific Pillar II capital requirements. The adoption of the SREP decisions for 2015 for all banks has been finalised. These decisions were taken at the beginning of 2015 on the basis of national SREP approaches, complemented by the results of the SSM Comprehensive Assessment.

From this year on, we will follow for the first time a uniform SREP approach. This is a key step for the single supervisor, and aims at ensuring a consistent treatment of significant credit institutions throughout the SSM.

In order to ensure a consistent application of the SREP methodology, we are currently going through an in-depth horizontal analysis phase. SREP assessments will be adjusted, based on the outcome of this analysis.

We must all recognise though, that consistency in supervisory approaches would be even more effective if all SSM institutions would be subject to the same regulatory requirements. In this regard, we are far from a satisfactory situation, due to significant differences in national banking regulations within the SSM and within the EU. Today, we have a single rulebook for banks in name, but not in fact.

Regulatory treatment of capital

This brings me to the topic of the regulatory treatment of capital, which encompasses our current work on the so-called options and national discretions.

One of the main goals of the international framework of Basel III was to promote a more resilient banking sector by raising both the quality and quantity of capital. As you know, Basel III has been adopted in Europe through the CRDIV-CRR package.

Both Basel III and the CRDIV-CRR package included transitional arrangements to help ensure that the banking sector could meet the higher capital standards through reasonable earning retention and capital raising while still supporting lending to the economy. The CRDIV-CRR package’ allowed competent authorities to decide on how to apply such transitional arrangements which led to an unequal application between participating Member States.

Since the ECB became the competent authority responsible for euro-area banks, it acquired the right and the obligation to take supervisory decisions in the best interest of the Banking Union.

With this objective in mind, a project was launched to identify and assess the possibility to harmonise, where appropriate and in a rigorous way, the exercise of both transitory and permanent supervisory options and national discretions. These options and national discretions are currently being discussed in coordination with the National Competent Authorities and the EBA, in light of the objective of the Banking Union to promote financial integration and financial stability.

Anacredit

Let me briefly discuss the other topic you have asked me to address, namely, the Analytical Credit Dataset or AnaCredit initiative. This project was initiated prior to the launch of the SSM. Its original goal was to establish a core set of harmonised granular data, which could be useful for several central banking purposes such as monetary policy and operations, risk management, financial stability, research and statistics. Throughout the mapping out of this initiative, the need to minimise the reporting burden has always been front and centre.

The first stage of the AnaCredit project is envisaged to run until early 2018. The focus during this stage is on loans granted by banks to companies with a threshold of EUR 25,000. This should allow enhanced analysis on lending to SMEs. At a later stage, planned for 2020, mortgage loans of households and credit of so-called sole proprietors [in other words a sole owner of a business or self-employed person] may also be collected. However, this will be done only on an anonymised basis and, as I would like to highlight, no collection of sensitive information such as family status or religion is envisaged.

Even though the project was launched by the ECB prior to acquiring its supervisory tasks, the new supervisory function can also make use of – and stands to benefit from – the initiative going forward. AnaCredit makes available comparable data, with a high level of detail, especially when it comes to breaking down banks’ portfolios by borrowers, performing or non-performing loans, and so on. The derived indicators and analyses will be useful to supervisors, for example, for assessing risk weighted assets for modelling and benchmarking purposes, or to review internal risk assessment procedures of supervised banks.

Cooperation with the SRB

Before concluding, let me say a few words concerning the interaction between supervisory and resolution authorities. I want to stress one thing up front: I am very much convinced that the SSM would gain a lot from having a strong SRM standing by its side. That is why I am strongly committed to putting in place a very close cooperation between the SSM and SRM. This will be to our mutual benefit. This will also be crucial to minimise administrative burdens for the banking system, and avoid that banks receive conflicting messages.

This cooperation between the SSM and the SRM will be laid out in a Memorandum of Understanding, which will describe the information flows between the two authorities. Already at this stage, the ECB and the SRB are exchanging information, as legally foreseen. Cooperation on the envisaged MoU has begun. We have also started to cooperate on several topics, in particular as regards IT collaboration.

Conclusion

In conclusion, while a lot has been accomplished since the launch of the SSM, multiple challenges still lie ahead. Aligning supervisory approaches and practices throughout the SSM to high-quality, tough standards, remains one of our priorities.

To that end, this year we initiated the comprehensive review of banks' internal models for capital requirements and a prudent harmonisation of the application of national options and discretions in CRR and CRDIV. We are also actively aiming at achieving consistent supervisory outcomes, an adequate balance of supervisory intensity between significant and other banks, as well as establishing robust cooperation within and outside the SSM.

Finally, we are looking forward to the outcome of the legislative process on bank structural reform. Leaving the substance of the outcome aside, coming to a conclusion will lift the current uncertainty and allow banks to develop their longer-term business model. We trust that Parliament will play its role in this and in ensuring that the legal framework allows for a uniform implementation of the Regulation within the SSM.

Thank you very much for your attention.

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