Second ordinary hearing in 2015 of the Chair of the ECB’s Supervisory Board at the European Parliament’s Economic and Monetary Affairs Committee

Introductory statement by Danièle Nouy, Chair of the Supervisory Board of the ECB,
Brussels, 19 October 2015

Mr Chairman,

Honourable Members of Parliament,

Introduction

I am glad to be here today to discuss with you the work of the ECB within the Single Supervisory Mechanism. Since my last hearing in June, we have worked on number of important issues and I will be happy to report on them. In my introductory remarks, I will first give an overview of the developments in the banking sector and touch on the main issues we have been working on. I will then address in more detail the follow-up to the comprehensive assessment as well as the so-called national options and discretions.

State of play

Banking Sector

Let me start with an overview of the developments in the banking sector. Banks are still facing major challenges, in particular weak profitability and the persistence of non-performing exposures on their balance sheets. Regarding, weak profitability, there have been signs of improvement in the first part of this year. However, banks still need to cope with a low interest rate environment and an uneven economic recovery. Going forward, this environment may induce a number of banks to adjust their business models towards activities that rely less on traditional interest income generating business. Moreover, non-performing exposures still represent a serious prudential challenge in some countries. A number of factors underlie this problem, including general economic conditions, poor banking practices and flawed legal frameworks for debt recovery. We as supervisors can address some of these causes, while others go beyond our remit. For tackling the problem, it is clear that there is no one-size-fits-all solution and policy makers need to be careful not to distort banks’ incentives. The ECB – which has launched a dedicated workstream on this issue – is therefore working with banks in developing and implementing individual and tailored action plans.

Key projects and decisions in the Supervisory Board

Let me now give you a brief overview of the key projects and decisions of the Supervisory Board. Since my last hearing, significant progress has been made on the Supervisory Review and Evaluation Process – or SREP for short – and the work on national options and discretions – I will come back to them in-depth. Furthermore, we have continued to improve our internal processes, towards more efficiency and more harmonisation.

In early summer, the uncertainty surrounding the Greek programme was for us, just as for you, at the centre of our attention. For Greek banks, these developments implied a renewed very intense and stressful episode. We therefore monitored the developments very closely and took supervisory actions where needed. We were relieved that an agreement was reached at the Euro Summit in July. In the follow-up to the Summit, we are now conducting a comprehensive assessment of the four Greek significant institutions, to help determine the recapitalisation needs. The recapitalisation should be concluded by the end of the year. Thus it is important that the necessary funds will be available on time.

SREP and capital requirements

Let me now focus on the SREP in more detail. This process determines for each bank the institution-specific Pillar 2 capital requirements. In 2015, the ECB carried out the SREP for the first time according to a common methodology for the around 120 largest banking groups in the euro area. This methodology ensures that high supervisory standards are applied in a harmonised way across the euro area.

Pillar 2 capital decisions were prepared, first, taking into account persisting and developing risks faced by banks due to economic and market conditions in the euro area such as credit and liquidity risk; second, with the objective that banks transition smoothly from current capital positions towards a fully-loaded Basel 3 environment in 2019; and, third, doing all the above while maintaining the level playing field, both within the SSM and with other major jurisdictions.

While the SREP decisions will only be finalised later this year, we can already say that Pillar 2 capital requirements envisaged for the SSM significant institutions in 2016 are slightly higher than in 2015 – by circa 30 basis points on average. In addition to Pillar 2, the phasing-in of buffers requires around 20 additional basis points of capital.

Comprehensive assessments and stress tests

Let me give you a brief overview of our current and future work on comprehensive assessments and stress tests.

Follow-up to the 2014 comprehensive assessment

As you know, we carry out a comprehensive assessment for every bank that comes under ECB direct supervision.

Looking back at the comprehensive assessment of 2014 and its follow-up, this exercise has proven to be an effective tool to prompt the actions required to increase the Common Equity Tier 1 capital of banks facing a shortfall and remedy qualitative findings as identified in the asset quality review – or AQR, as we abbreviate it – for a broader number of participating banks.

The acceptance by the affected banks of the quantitative and qualitative results of the AQR was good. Last April, the ECB estimated that about two thirds of the additional losses identified by the AQR were recorded in 2014 financial statements and the last third was treated as prudential requirements, which resulted in a general increase in the provisioning coverage of non-performing exposures.

Measures undertaken by the banks included divestments, capital raising measures and restructuring activities as well as improvements in risk management and prudential accounting procedures.

On top of the strengthening of balance sheets, this exercise improved transparency and gave us access to a vast array of data, which we used to build up knowledge about the banks we are now supervising. More generally, it gave the SSM the opportunity to start its supervision on a credible footing.

Current comprehensive assessments and the 2016 EBA stress test

Throughout 2015, we have been conducting a new comprehensive assessment focused on nine banks, following the methodology used in 2014. Out of the participating banks, five became significant in 2014 and thus are already supervised by the ECB, but were not or partly included in the previous exercise. The exercise will be concluded in November and we will publish the results then.

In 2016 the EBA, in cooperation with the ECB and national competent authorities, will carry out an EU wide stress test. The sample of banks has yet to be finally approved by EBA. For this exercise, we will follow the EBA stress test methodology which is currently under development. The macro-economic and financial scenarios will be provided by the ESRB and EBA, and are designed in cooperation with the ECB.

National options and discretions

I will now turn to the topic of national options and discretions or ONDs for short. As indicated during my last hearing, the CRD IV / CRR and accompanying “level 2” acts contain a high number of provisions that allow either to choose from alternative treatments – we would call this an option – or simply not to apply certain provisions – which we call a discretion.

These ONDs affect every part of the prudential framework and range from the progressive phase-in of new standards and definitions to more permanent exemptions from the general rules. They can have a general reach, or imply case-by-case assessment based on individual requests by banks – such is the case of capital or liquidity waivers for instance.

The ECB’s current work addresses, as a priority, 122 ONDs which fall under its direct competence. The scope of the ECB’s work is further focused on the exercise of ONDs for significant institutions.

A public consultation will be organised in November on both a draft ECB regulation, containing ONDs of a general nature, and a draft Guide. The latter will contain first and foremost the specifications of CRR criteria related to case-by-case assessments. Of course, all public and private stakeholders are warmly invited to comment on the draft legal package.

The core principles underlying the policy design were prudence, harmonisation, compliance with international standards, and respect of legitimate expectations set by the previous implementation of ONDs at national level. Overall, we should be able to achieve a high degree of convergence and prudence at a very bearable cost.

After the finalisation of the legal act next year, the ECB will look at the possibility to also harmonise the options and discretions for the less significant institutions.

Furthermore, it is important to mention that an additional 45 ONDs relate to macroprudential issues or are not exclusively available to the supervisor, but rather to Member States, meaning national legislators. The Supervisory Board therefore did not discuss those. However, there will be a need to address them at a later stage in order to ensure a level playing field across the banking union.

Indeed these numerous options for Member State and also the flexible implementation of many articles in the Capital Requirement Directive make it very hard to achieve a full Single Rule Book, and the ECB, as a supervisor, may need to follow 19 different standards. This makes our life as supervisors much more difficult and impedes important investment decisions to be taken by the market and the banks. European legislators could therefore consider looking into this as a matter of priority. I also know that you are very interested in the topic and I will be happy to provide our thoughts and advice on the issue, if need be.

Conclusion

Let me conclude. At the outset of year 2 of the ECB’s activity as supervisor, our banks face persistently low profitability and – in some countries – high non-performing exposures, as well as uncertainty about the global recovery. Our supervisory work will remain focused on preserving and restoring the qualitative and quantitative adequacy of banks’ capital, as only well-capitalized banks can durably support the real economy. At the same time, as the key institution of the first pillar of the banking union, we are delivering on our mandate to level the playing field for the SSM banks, by aligning the exercise of ONDs, and by applying a harmonised methodology when reviewing and evaluating the banks under our supervision.

I am fully convinced that establishing the SSM represents a milestone with regard to strengthening and harmonising banking supervision across the euro area.

Thank you very much for your attention and I am now looking forward to our discussion.