Introductory statement to the panel discussion at the ECON Committee of the European Parliament
Speech by Danièle Nouy, Chair of the Supervisory Board of the European Central Bank,
Brussels, 16 February 2016
Honourable Members of Parliament,
It’s a great pleasure for me to be here at the Interparliamentary Committee Meeting.
Originally, I had planned to talk to you about two issues:
First, what are the achievements of the Single Supervisory Mechanism in the first year? And second, to what extent do differing national banking rules prevent effective and single supervision?
However, given the current situation in the markets, I think that it makes more sense to provide you first with the ECB supervisory assessment of the situation of the euro area banking sector.
Assessment of the situation in the banking sector
The situation in the euro area banking sector today is very different from what it was in 2012.
The banking sector is much more resilient, as Common Equity Tier 1 ratios of the significant institutions increased on average from approximately 9% in 2012 to about 13% following our Supervisory Review and Evaluation Process, also known as “SREP”.
In addition, the quality of the banks’ capital has also been substantially improved.
Thus, the sector is much more able to absorb unexpected financial or economic headwinds than a few years ago.
There is still a subset of banks with elevated levels of non-performing loans. However, during the comprehensive assessment, these NPLs have been identified, using for the first time a harmonised definition. Equally importantly, these NPLs have also been adequately provisioned for.
So, we are in a reasonably comfortable position to continue to promote progress in bringing down NPLs in an orderly manner, over the next few years.
With the 2015 SREP cycle, we have articulated the steady-state Pillar 2 supervisory capital requirements we expect to see in the banking system. This means that, all other things equal, capital requirements will not be increased further.
The significant banks under ECB supervision are well prepared to meet the CRR/CRDIV fully loaded capital requirements by 2019. Indeed the vast majority are already there. The others are meeting phased-in requirements and have profit distribution policies in place which allow them to meet the new requirements by the 2019 deadline.
In 2015, the banks under ECB supervision further increased profits relative to 2014. This permits banks to have appropriate profit distribution policies, while still meeting regulatory capital requirements and buffers, and supporting lending to the economy.
The sector also has buffers to meet distributions on Additional Tier 1 capital instruments. As the requirements are being phased in, banks already well exceed minimum thresholds, and are continuing to build buffers over the phase-in period.
With the Bank Recovery and Resolution Directive, or BRRD, we now have a resolution regime that ensures the banking sector bears the costs of recapitalisation, should a bank need to be resolved, and not the taxpayer. While the BRRD appropriately increases market discipline for investors and banks, the recent increase in spreads does not appear justified in light of the much higher capital levels that banks hold above minimum requirements.
These, I think, are very important points to note at the current juncture. But allow me now to also briefly touch on the issues I had originally intended to speak about.
First, on the achievements of the Single Supervisory Mechanism in its first year: the establishment of ECB Banking Supervision as the supervisor for the whole euro area in the short period of time available has been an unprecedented achievement.
In fulfilling our supervisory role, a cornerstone of our approach is to treat all supervised banks with the same characteristics equally, in other words, to be a truly single supervisor. In order to fully achieve this objective, the ECB needs two things: homogeneous rules and a homogeneous way of applying them.
Since the Single Supervisory Mechanism was established, we have taken major steps in both areas. Regarding the application of prudential rules, we have established a common methodology for the Supervisory Review and Evaluation Process applicable to all significant institutions. This means that we now set rigorous and fair supervisory requirements across the board and move towards a level playing field within the applicable legal framework.
However, we do not have a truly single rulebook yet, and therefore a full harmonisation of supervisory practices is not possible. One issue in this respect are the so-called options and national discretions in CRR and CRDIV . Some of them are for the ECB to exercise and I can already tell you at this stage that a harmonisation policy for the vast majority of them will be implemented in the course of 2016.
The second topic I wanted to address was how differing national banking rules prevent effective and single supervision.
There is a limit to what the ECB can do in harmonising national supervisory rules. There are differences which we cannot address ourselves as supervisors. These divergences distort the level playing field and make our lives as supervisors more complicated. These divergences have different sources.
First, Union legislation currently grants options also to Member States, which can be exercised through national laws. In this case, there is nothing that the ECB can do to pursue further harmonisation. Here, legislative initiative is necessary to fix the source of the problem.
Second, a substantial source of divergences arises from the use of directives instead of regulations. Let me provide an example. The moment when the swift intervention of the supervisor is most needed is perhaps when a bank is experiencing trouble. This is why the BRRD has given the supervisor early intervention powers. Being an EU Directive, however, the BRRD left the exact transposition into national law to the Member States. As a result, the ECB is confronted with 19 different legislations to follow in the euro area. Consistent legislation in this field, ideally through EU Regulations, is, in my view, not just desirable but necessary.
Third, national legislation can also be a problem for the level playing field in the banking union, even when there is no need to transpose Union legislation. The discretion available to the ECB for harmonising the rules in the banking union is constrained by additional rules and obligations which are introduced by national law. In some countries, for example, non-binding supervisory practices are converted into binding legal acts. In order to achieve a genuine banking union, Member States should thus refrain from setting obstacles both to uniform supervisory practice and to the exercise of supervisory discretion by ECB Banking Supervision.
Let me conclude. I spoke about what we have achieved and I highlighted the remaining obstacles. The SSM was created by the Union legislators with a mission to pursue, and we are doing our best to accomplish it. There are, however, limits to what we can do on our own and we will need your help, the legislators, both at European and national level, to achieve truly single supervision. We need to work together to reduce existing fragmentation and we need to be vigilant on draft legislation, both at national and Union level, to ensure that prudential rules for banks are fully harmonised, to accomplish the mission that you have entrusted us with.
Thank you for your attention.
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