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Times they are a-changin’ – the “new normal” and what it means for banks and supervisors

Speech by Danièle Nouy, Chair of the Supervisory Board of the ECB,
at a Deutsche Bundesbank reception, Frankfurt am Main, 15 November 2016

Ladies and gentlemen,

The overarching theme of this year’s Euro Finance Week is “the new normal”. In my view, this is a well-chosen topic, as the world of banking has indeed changed dramatically. And this change did not creep in as change so often does; it arrived with a big bang, namely the global financial crisis of 2008.

Back then, we all realised that the past was other than how we had perceived it: risks were higher, vulnerabilities larger, profits less sustainable, regulation looser, and supervision was weaker and too fragmented.

It was clear that all these things had to change, and many of them have. The unsustainable “old normal” has been replaced by a more stable “new normal”. Such a transition naturally requires adjustment. Banks have to adjust to tougher rules and harmonised supervision. This is a necessary step towards a more stable banking sector.

However, the term “the new normal” is more than just a way of describing a correction of past distortions. It also captures an economic environment that is characterised by lacklustre growth, low inflation and low interest rates. This too requires banks to adjust.

Let’s take a closer look at the “new normal” and what it means for the banks and their supervisors.

Banks – remaining profitable

It seems that, in Germany, the most fiercely debated elements of the “new normal” are low interest rates and stronger regulation.

Let’s first take a look at regulation. Naturally, supervisors have a rather positive view of regulation – so do taxpayers and everybody else who suffered as a result of the recent financial crisis. And so should banks, because they too benefit from stronger regulation. After all, it instils confidence. And since the crisis, confidence in the banking sector has been as scarce as it has been necessary.

Nevertheless, it is a question of striking the right balance. No one would benefit from a regulatory framework so tight that it squeezes the life out of the banking sector. Be assured that regulators are aware of that. In my view, the recent regulatory reform is well balanced: it ensures stability without choking off the flow of credit that is necessary to finance the economy.

There is just one thing we still have to achieve: regulatory certainty. I am fully aware that any reform creates uncertainty until it is finalised. How can banks plan for the future when they do not know what rules they will have to comply with? Regulators must therefore provide regulatory certainty. Basel III should be finalised by the end of the year and it should not, on average, significantly increase capital requirements. And, equally important, this has to be achieved in a way that preserves a level playing field for banks globally.

Now, what about the second element of the “new normal” so fiercely debated in Germany? What of low interest rates? It is true, of course, that coping with a prolonged period of low interest rates is not an easy task for banks. For large banks in the euro area, net interest income accounts for almost 60% of total operating income. So, low interest rates might indeed have a sizeable effect on profits eventually.

Still, it seems that the German debate on low interest rates is a bit one-sided. First, it neglects the fact that low interest rates also have positive effects. They support the economy, and banks benefit from that. Second, it suggests that the ECB sets interest rates in an arbitrary manner, which is not true: interest rates always reflect the state of the economy; and the state of the economy is determined by factors that lie outside the control of monetary policy. Third, it neglects the fact that low interest rates are, to some degree, a structural phenomenon. In fact, real interest rates have been on a downward trend for a few decades. This decline is driven by structural developments, such as ageing societies and lower productivity growth.

Most importantly, it seems that low interest rates have become the symbol for a much broader issue. It is true that European banks do suffer from a lack of profitability. But low interest rates are not the sole reason for this. A number of other issues play a role, for example high costs eating into profits, legacy assets weighing down balance sheets, fee-generating business becoming more difficult and, in several countries, continued fragmentation of the banking sector.

At the same time, digitalisation is bringing new competitors onto the market, challenging traditional business models. Nevertheless, going digital might be more an opportunity than a curse. To those who embrace it, it offers the opportunity to become more efficient, to unlock new channels of distribution and to win new customers.

In any case, banks need to rethink their business models in order to cope with the “new normal”. In doing so, they should look beyond low interest rates and regulation.

Supervisors – ensuring a stable banking sector

From our perspective as supervisors, business models are definitely one of the main issues – and that includes all the challenges I just mentioned. If banks fail to adjust their business models, they will have a hard time remaining profitable.

However, from a supervisor’s point of view, there is a right way for banks to adjust and there is a wrong way for them to adjust. Banks must not embark on a dangerous search for yield in order to increase their profits. This would not be the right way to adjust, as it could easily lead to new problems further down the road for the banks themselves and the financial system as a whole.

And this is not just a hypothetical concern. The cocktail currently being served to banks is low on profitability, but rich in liquidity and competition. Experience shows that too much of this kind of drink might tempt banks to take on more risk than they should. That is why strong risk management is essential.

Consequently, as supervisors, we are not only analysing business models and profitability drivers. We are also looking closely at risk management. From our point of view, effective risk management requires two things: sound governance structures and high-quality data.

With regard to governance, we have recently published a thematic review that outlines our supervisory expectations and concludes that many euro area banks need to improve in order to achieve international best practices.

As far as data quality is concerned, the “Principles for effective risk data aggregation and risk reporting” published by the Basel Committee on Banking Supervision in 2013 are a suitable benchmark. We will closely monitor whether banks apply these principles.

Also important are the internal models that banks use to calculate risk-weighted assets and thus capital requirements. Here, greater harmonisation would be beneficial in order to ensure more consistent results. This would help to restore the credibility, adequacy and appropriateness of these models.

Along with business models and risk management, a third issue that occupies our minds is credit risk. With a view to the future, we closely monitor potential risk concentrations in areas such as shipping and commercial real estate.

Looking back, we can see that, in some cases, credit risk has manifested itself in the high volumes of non-performing loans that afflict banks today. They weigh down balance sheets, curb profitability and impede the flow of credit to the real economy.

It is, therefore, in the interests of both the banks and the economy to reduce the amount of non-performing loans. But it cannot happen overnight. Obviously, the banks themselves are responsible for cleaning up their balance sheets, and they should do so as quickly as possible. Nevertheless, the speed with which they can act depends on a number of things. For instance, the relevant legal and judicial frameworks differ between countries and sometimes hamper the speedy resolution of non-performing loans. Here, national policymakers could assist the banks by reforming the relevant law.

As supervisors, we can assist the banks by pointing out best practices and ensuring their application. In this regard, the ECB is conducting a public consultation on guidance for banks on dealing with non-performing loans, which ends today at midnight. That guidance takes the form of recommendations to banks and sets out a number of best practices that we have identified. It sets out our supervisory expectations and serves as a basis for supervisors to evaluate how banks handle non-performing loans.

Supervisors – ensuring a level playing field

Ladies and gentlemen, in our supervisory work we certainly benefit from a broad view that takes into account the entire euro area. In Germany, we draw on the invaluable support of well-established and recognised institutions, namely the Bundesbank and BaFin.

This allows us to compare banks, identify problems early on, pick the best solutions and implement them in a harmonised manner. It ensures that all banks are supervised according to the same standards – supervision cannot be tough if it is not fair. European banking supervision improves the stability of the banking sector and helps to restore confidence.

At the same time, it helps to provide a level playing field for banks across the entire euro area. Harmonisation ensures fair competition and supports the emergence of a European banking sector.

Naturally, this is most relevant for the 129 large banks that are directly supervised by us. With regard to these banks, our main achievements so far have been to harmonise the Supervisory Review and Evaluation Process and to harmonise the exercise of options and discretions in the EU Regulation.

Nevertheless, the smaller banks also benefit from harmonisation. These institutions are directly supervised by national supervisors, and rightly so. Still, together with the national supervisors, we have developed a number of joint standards that ensure harmonised supervision of smaller banks. Currently, we are about to extend the harmonised exercise of national options and discretions to smaller banks, and we are planning to adapt the Supervisory Review and Evaluation Process to these institutions as well, of course, in both cases with proportionality.

Again, the objective is to strike a balance. We do not want to overburden smaller banks, but we also do not want to neglect relevant risks. Naturally, there might be some disagreements on what the right balance is, and banks may have a different view from supervisors and regulators.

In my view, we have struck a balance. The regulatory framework does not prevent proportionate supervision of smaller banks. And this is exactly what we put into practice: fees and reporting requirements follow the principle of proportionality, as do the joint standards we have developed together with the national supervisors.


Ladies and gentlemen, since the financial crisis, the financial world has definitely changed. The unsustainable “old normal” has been replaced by a more stable “new normal”.

We have strengthened regulation and we have harmonised supervision. These reforms require banks to adjust, but eventually provide a more solid foundation for sustainable business.

At the same time, the economic environment has changed as well. Partly cyclical, partly structural, the new conditions challenge banks’ business models. It is important, however, to note that these challenges go beyond low interest rates. Adjustment is therefore necessary, and it should be broad-based.

I acknowledge that it is always burdensome to adjust to a new environment, but it is also part of life. And those who embrace change instead of resisting it will thrive. The newly minted Nobel Laureate, Bob Dylan, sang: “ … you better start swimmin’ or you’ll sink like a stone, for the times they are a-changin’”. He might not have had banks in mind when he wrote those lines, but they too should heed his words.

Thank you for your attention.


Banca Centrală Europeană

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