Intervention at the opening of the Frankfurt office of the EBF

Intervention by Ignazio Angeloni,
Frankfurt am Main, 14 October 2015

1. Introduction

I am very pleased to be here this evening for the opening of the new Frankfurt office of the European Banking Federation. Also on behalf of Danièle Nouy, Chair of our Supervisory Board, I would like to welcome you to this city and express our best wishes for a fruitful work.

The European Banking Federation is the united voice of banks in Europe. It represents 32 national banking associations that speak for some 4500 banks, which together grant loans to the European economy in excess of € 20 trillion. As such, the Federation is an important stakeholder of the Single Supervisory Mechanism (SSM). The establishment of an office in Frankfurt will help ensure better cooperation between our institutions. The SSM and the banks should work together to promote a sound banking industry in Europe.

We will soon mark the first anniversary of the operational launch of the SSM. So, it is a good time to reflect on the accomplishments so far and on our next steps forward. Let me dedicate a few words to this first.

2. The SSM at 1

Over the last year we have achieved our most important objective: ensuring a smooth transition from the old supervisory framework, based on 19 national authorities acting separately, to a single structure, to which all national authorities contribute. Inevitably, not everything in the new system is already as perfect as we would like. But the transition was completed without major problems, and the new system is working. We owe this result to the good cooperation among all participants – national authorities, banks and SSM staff – as well as to the careful preparatory work by the ECB.

I would like to highlight three areas where progress was achieved: the comprehensive assessment, the Supervisory Review and Evaluation Process (SREP), and regulatory harmonisation.

I do not need to describe the comprehensive assessment, as you are already familiar with it. For us the exercise was a game-changer on three fronts: repair, transparency and learning.

Regarding repair, the banks under our direct supervision have strengthened their balance sheets significantly, both in anticipation of the outcome of the exercise and thereafter. Looking only at CET1, our directly supervised banks increased their capital, between mid-2013 (when the comprehensive assessment was announced) and mid-2015, by well over 100 billion. Transparency was also enhanced, because the ample disclosure of the results gave investors important new information on the state of our banking sector. For example, with a new harmonised methodology used for the first time in the Asset Quality Review, we were able to identify additional non-performing exposures for an overall amount of EUR 136 billion for the system as a whole.

For us, the comprehensive assessment was also an important learning experience, in that it gave us new in-depth insight into the participating banks. The supervisory teams started working together and established their first contacts with the banks in the course of the assessment. That experience has proven invaluable in conducting day-to-day supervision and defining our supervisory priorities. Starting our work without that assessment would have been much more difficult.

Let me turn to the second driver of progress, the SREP. As you know, this is the procedure for assessing the main risk factors of each bank and determining the “Pillar 2” prudential requirements. This year we conduct our own SREP for the first time, based on a unified methodology that blends statistical and judgemental elements and that has been developed in cooperation with the national supervisors. Our SREP builds on previous experience and best practices, but goes beyond them, treating all banks consistently while taking differences in business models duly into account.

We are now in the final stages of the 2015 SREP. The preliminary results are being shared with the banks, in order to get feedback before the completion of the exercise.

Finally, important work is being conducted in the area of regulatory harmonisation. In particular, we are developing a consistent SSM-wide policy for exercising the options and discretions contained in European banking law. We have identified around 120 options and discretions exercised by supervisory authorities, and a single approach has been agreed upon for these by our Supervisory Board. It covers important areas such as capital, liquidity, large exposure requirements for cross-border groups, the phasing out of capital components not included in the Basel framework, the prudential treatment of insurance participations, and so on. The policy will apply initially to the banks we directly supervise. We are now preparing the legal text which will soon undergo public consultation. The industry is encouraged to contribute to it. We expect the package to enter into force in spring 2016.

3. Challenges for the European banking industry

If the recent times have been challenging for the supervisors, they have been no less so for the banks. The challenges you face stem principally from three factors: the economic and financial conditions, the evolving regulatory environment, and the competition within the banking industry.

In spite of the recent positive signs, the euro area economy has not yet recovered fully from the crisis. For the banks, this is reflected in a persistently large volume of non-performing exposures, placing a heavy burden on the balance sheets. The low level of interest rates helps the economy by sustaining consumer and investor demand, but also narrows interest margins, in this way reducing the returns from traditional bank intermediation. Bank profitability remains low by historical standards. This makes it difficult for many banks to generate internally the resources needed to strengthen their capital position, or to attract them from outside.

Meanwhile, banking rules are changing; this requires banks to adapt to a new and to some extent uncertain environment. Reporting, compliance and prudential requirements have increased. Although the process is undoubtedly beneficial once the new environment is phased in, it nevertheless involves transitional challenges. The hurdles are particularly intense for large institutions, which in addition to the normal requirements, are also subject to the new systemic risk buffers. In this context, the global competitive pressure on large players has increased.

Now, while all these challenges are real, we should not forget how we got to the present situation. Before the crisis, the banking system was seriously undercapitalised. Balance sheets conditions were highly uncertain, and many investors judged this problem to be more acute in Europe than elsewhere. Banks were encumbered by assets whose risk was seriously underestimated, by the industry and by regulators. Systemic risk was not recognised. These are the reasons why the crisis was so painful and persistent, in some countries in particular. We are now, I think, moving in the right direction. The process must be completed. Banks can only compete effectively if they have strong balance sheets. As supervisors, we are determined to work in close cooperation with the industry to make Europe’s banking system as resilient, transparent and competitive as possible.

4. Conclusions

After one year, the SSM has taken off successfully. We are outgrowing our infancy and leaving the transition behind us. We are increasingly gaining a good insight into our banks, both as a system and individually. To progress further in this direction, we need to maintain a constructive dialogue with the banking community. Supervisors and banks have one common goal, namely ensuring a sound banking system.

I am convinced that the European Banking Federation’s office in Frankfurt will contribute strongly in this direction. We and I personally look forward to interacting with your representatives here in the coming months and years.

I wish you much success.