Introductory statement to the press conference on the ECB Annual Report on supervisory activities 2016 (with Q&A)

Danièle Nouy, Chair of the Supervisory Board of the ECB, and Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the ECB, Frankfurt am Main, 27 March 2017

Jump to the transcript of the questions and answers

Danièle Nouy, Chair of the Supervisory Board of the ECB

Ladies and gentlemen,

It is incredible how time flies. Just five years ago, in June 2012, the leaders of the EU agreed to take banking supervision from the national to the European level. And here we are, already in the third year of European banking supervision.

One of the most prominent issues we dealt with in 2016 was non-performing loans, or NPLs for short. And NPLs will remain a top priority for some time to come. So far, the good news is that NPLs in the euro area declined by €54 billion to a level of €921 billion between the third quarters of 2015 and 2016. As a result, the ratio of NPLs shrank from 7.3% to 6.5%. Still, in some Member States, NPLs remain a big issue. They weigh on the profitability of banks and limit their ability to finance the economy.

Just one week ago, we published guidance to banks on how we expect them to deal with NPLs. Banks are required to come up with a clear strategy for reducing NPLs, a strategy which includes setting ambitious but realistic targets and putting in place relevant governance and operational structures. This guidance will ensure that banks take a consistent and effective approach to reducing NPLs.

But banks and supervisors are not the only ones who need to act. In some countries, legal and judicial frameworks hamper the speedy resolution of NPLs. National lawmakers should therefore act, too. Building on our stocktake of national practices, they could make judicial systems more efficient; they could create fast out-of-court procedures; they could increase access to collateral and align fiscal incentives.

Another major project that we launched is the targeted review of internal models, or TRIM for short. Many banks use internal models to determine how risky their assets are. Risk-weighted assets in turn form the basis for calculating capital requirements. That makes internal models highly relevant from a prudential point of view.

Over the years, banks have made their models ever more complex in an effort to map their risks as precisely as possible. But the more complex the internal models, the more prone they are to errors, or even to manipulation.

Thanks to their risk sensitivity, models are good management tools. But their outcomes should also be consistent and comparable. Against this backdrop, TRIM will assess how robust and reliable the banks’ internal models actually are. The goal is to ensure that the calculation of risk-weighted assets is driven by actual risks rather than by modelling choices.

To be sure, our goal is not to increase risk-weighted assets across the board. However, we may see risk-weighted assets increase for some banks. Altogether, TRIM will help enhance the soundness of internal models and thereby make them more credible. And it will help to level the playing field for banks in the euro area. At the same time, TRIM will contribute to a more stable banking sector.

Banking is not only about stability, but also about profitability. And profits are a weak spot for euro area banks: many banks in the euro area don’t even earn their cost of capital. This concerns banks and investors, and it concerns us supervisors. After all, stability and profitability are two sides of the same coin.

The profitability of banks and their business models have therefore been one of our key priorities for some time now. Of course, we don’t tell banks what their business models should be. What we do is to challenge their sustainability and closely monitor the issue. And we do see some profitable banks. What is their secret? Well, one feature these banks share are solid cost structures – this should be a hint to other banks as well.

But it is not just about costs. Banks are facing many challenges these days. I already talked about NPLs and could also mention political uncertainty and sluggish growth, a difficult interest rate environment, stronger rules and new competitors. The world is changing and banks should embrace that change: they need to adapt their business models to become profitable again.

Another issue is that, in some countries, banking sectors are still highly fragmented. The resulting overcapacities lead to strong competition and weak profits. In such a situation, one should expect some banks to be pushed out of the market. In my view, there is a clear case for consolidation, for instance through mergers and acquisitions. However, we have not seen many mergers and acquisitions so far, and any that we have seen have taken place within one country rather than across borders within the euro area.

This is where the banking union comes into play. The aim of the banking union is to provide the foundation for a truly European banking market, one in which we would also see cross-border mergers. Banks would become more European in scope, offer their services throughout the euro area and benefit from a larger market. At the same time, customers could choose from a wide range of banks that are supervised according to the same high standards. That is our vision for the future.

Thank you for your attention!

Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the ECB

Ladies and gentlemen,

The job of European banking supervision is to make banks resilient. In doing so, it helps to create a safe and sound European banking sector: a banking sector that can be a reliable partner for the economy.

But we can only do our job on the basis of sound regulation. Since the crisis, policymakers have made regulation stronger and amended it where needed. These reforms have enabled supervisors around the world to do a better job.

And they help banks to do a better job as well. After all, only well-capitalised and well-governed banks can reliably finance the economy. Only stable banks can finance long-term growth and prosperity. So we need regulation, and it should be based on global standards.

The latter point is crucial, in my view. It is another lesson from the crisis that we should not forget. To ensure stability, we need a global approach to regulation. That’s why the Basel framework is so important. And that’s why we have to finalise the Basel III reforms as quickly as possible.

By now, solutions for many issues have been put on the table. At the end of the day, Basel III can only be adopted as a package – the Basel Committee is close to reaching an agreement, however. In that context, we welcome the G20’s commitment to finalising Basel III.

Going from the global to the European level, we very much welcome the current review of the European legislative framework. The European Commission has made proposals on how to adapt and amend the relevant laws.

The ECB will publish an official opinion on these proposals in May. And personally, I see many good things in the proposals.

First, they are in line with the global approach, as they transpose some global standards, such as the Leverage Ratio, into European law.

Second, they support the idea of the banking union, as they allow for capital and liquidity waivers within a banking group on an EU cross-border basis.

And third, they strengthen the principle of proportionality, as they seek to reduce the regulatory burden on smaller banks.

Of course, there are also things that might need to be reflected on further.

First, while supervisors need to be able to act quickly and flexibly, based on their expertise and judgement, some of the proposals seek to put a tight frame around supervisory actions. That would limit our ability to adapt our actions to the ever-changing financial industry – an industry that always looks for the best deal and seizes any chance to arbitrage the rules – rules that cannot be adapted as quickly as banks test their limits.

And second, there is still room to further harmonise the rules – for instance with regard to national options and discretions.

Ladies and gentlemen, we have talked about supervision, and we have talked about regulation. There is one last issue I would like to touch upon: Brexit. Over the past few weeks, Danièle and I have publicly talked about Brexit and laid out how we will approach the issue and how we expect banks to approach it. So let me just briefly raise a few points.

The EU and the UK have not started negotiating yet. Still, both banks and supervisors must prepare for any potential scenario. For the banks, it is mostly about market access.

Many UK banks rely on the European passport to operate in the single market. The passport gives them access to the entire single market as long as they are established in an EU country. In the event of a “hard” Brexit, they might lose this passport and would have to seek another path into the single market.

The most obvious option would be to obtain a banking licence in an EU country in order to regain the passport. It is the ECB that grants licences in the euro area. And to be clear: we will only grant licences to well-capitalised and well-managed banks.

We will not accept empty shell companies. Any new entity must have adequate local risk management, sufficient local staff and operational independence. To enable banks to comprehensively comply with our requirements, we will grant bank-specific phase-in periods. In doing so, we will take into account the business activities and the risk profile of each bank.

We will be cautious of regulatory and supervisory arbitrage, and we will not take part in a race to the bottom in that regard. That’s why we will keep a close eye on how banking groups structure their euro area entities.

Some banks might want to use a complex and diverse set-up, adapted to the range of activities they plan to pursue in the euro area.

Many incoming banks might plan to establish significant or less significant credit institutions, or to expand already existing ones. These banks would either be directly supervised by the ECB or by the national competent authorities under the common European supervisory approach of the ECB.

Some banking groups might also consider using a third-country branch for part of their banking business. Third-country branches are subject to banking supervision, but at the national level and according to national standards. And these standards can greatly differ from one country to another. Some national supervisors, for instance, oblige third-country branches to have capital and liquidity of their own; others do not.

All this runs counter to the idea of a level playing field in the euro area. It is an invitation to banks to engage in regulatory or supervisory arbitrage. Still, there might be a chance to address this topic as part of the current review of the European legislative framework that I have just talked about.

Brexit will bring major change. That much is clear. One thing will not change, though. The financial sectors in the UK and the EU will remain closely connected.

Ladies and gentlemen, we are prepared for any outcome of the negotiations, and the banks should be too. And let me assure you once again: as supervisors, we will not participate in a race to the bottom. After all, we all share an interest in having a stable banking sector – on both sides of the Channel.

Many thanks for your attention.

* * *

Can you maybe just carry on a bit about the third-country branches issue? Just maybe you could say what you're seeing, where the concerns might be and if you have any past experience with this before the Brexit context.

Lautenschläger: Well, this is a specificity of the EU that you have legal independent entities, subsidiaries under either the direct supervision or indirect oversight of the ECB banking supervision. But the third-country branches, as they are branches and not legal independent entities, they are outside of it. So you can book or you can be active via the branches with banking activities, but you are not then under the ECB banking supervision.

The question is not only about who is supervising but rather what kind of basis, what kind of regulations are going to be applied when supervising. Right now we have this already in the SSM area. Some of the branches are quite big, but when we are talking about Brexit we have many banking groups probably coming in. Then this gets a different dimension and it gets a question of, how might banking groups use this kind of fragmentation between national regimes and European regimes in order to ensure to get the best deal out of it. Here we do have some concerns and here one might think about, what do you do for example with significant-in-size third-country branches.

Nouy: There is one easy correction to that. The intermediate holding company that is on the table in the revision of the CRD IV/CRR, the branches should be attached, should be under this intermediate holding company for third countries, so would be also part of the SSM supervision because otherwise it is far too fragmented, as explained by Sabine.

I've got a question on these phase-in periods: you said it's bank specific so does it really mean you're going to have a plan for each individual bank? Or will you look at different sizes and group banks or phase-in periods?

What do you envisage: are we talking about a couple of months, half a year, a quarter?

Lautenschläger: Well, first of all it is bank – and it has to be bank-specific – because it depends on the activities, the scope, the size of activities coming to us. So it depends what kind of risks are related to it, what kind of information we will get with regard to the activities done under the UK PRA supervision, what kind of information we will get from the PRA. Then it will be, yes, a plan for each individual bank because when we are talking about very small activities, it might not be as relevant to do it very fast.

If somebody wants to, for example, book back to back a lot of activities, we will need to see it more urgently to move into a kind of local risk management with specificities to whatever they book back-to-back. So it is very bank-specific, but nothing that is unknown to us. Every bank here has its own what we call “Supervisory Examination Programme” where we have a kind of Excel sheet with a lot of different activities over the next three years, where we see the bank has to move to. So nothing new, it's just a question of the mass production.

So weeks or months?

Lautenschläger: Well, some will take months and some might even take one or two years.

I've got a question on non-performing loans. The NPL problem has been out there for many years. I'm wondering: why does it take such a long time to solve the problem? In my little simple world I would say: why not just write it off? Look at what it will cost, raise fresh capital and then off you go: where's the problem?

Nouy: Well, first of all when the amount is more than 900 billion for the SSM countries you can imagine that it's a big problem, the magnitude of the amount. We started to address non-performing exposures with the comprehensive assessment. It was the first time we had a common definition to identify them and that was provided by EBA, this definition. Then we made sure they were reasonably well provisioned. It was a lot of additional provisions that were made after the comprehensive assessment that included an asset quality review.

So after some work and discussions with the bank we are now moving one step forward. One element which is very important as well is that it's not only an issue for supervisors. It's an issue for national legislators, for example. There are countries where the capacity to repossess collateral is very small. Also the out-of-court fast-track solutions, which are the most efficient ones for certain categories of non-performing exposures, have to be developed. So that's why it takes so much time. But we were on a sound basis precisely because they were well provisioned after the comprehensive assessment.

So now after the guidance and what is expected from the banks for this management of non-performing exposures, the banks are in the process of receiving letters from us where they will be asked to provide their own plan. We explain what we expect and what we will be challenging. We have already seen action. A number of banks already are going to the market to clean their balance sheet in an one-off operation.

Well, it has been said for Monte dei Paschi after the stress test, we have seen big equity issuances from Unicredit, for example – and others will follow. Banco Popular Español has mentioned that it will use equity to clean the balance sheet. So we have to start by making denial impossible and gradually, but very firmly, going to solutions. Our next step after the guidance, after the plans to address the legacy assets for each bank, will be our expectations for the steady state in order to make sure that they are not new non-performing exposures that are created while we are addressing the old ones. But I am confident that the speed will be faster now, but it's a very delicate issue with a lot of stakeholders, not only the supervisors.

You mentioned Monte dei Paschi: recently the ECB provided information that the Commission had requested about Monte dei Paschi's solvency and about its situation and the context of the capital shortfall that you have identified. So my question is, can you give us that information, too: so is Monte dei Paschi solvent?

What happens if a bank's situation deteriorates between the stress test and the time when the precautionary recapitalisation is requested – like in this case?

My second question is: in Brussels you said that some banks may need to be unwound and in Europe that is an option that is possible - do you see many in this situation? Do you see any right now in the eurozone in this situation?

Nouy: Well, one element is not fully correct in your statement. It is not recently that we have given information to the Commission. Our cooperation with the Commission, which is a sister European institution, has started long before the end of last year. So we have been constantly keeping the Commission posted on the situation and the evolution of the situation. So this is work that has been going for some time and I'm sure there will be, soon, a decision about the situation.

For the rest, you mentioned the solvency statements. Well, a solvency statement is the starting point of precautionary recapitalisation. So obviously this is something that has been done - otherwise we would not even be talking about precautionary recapitalisation. Precautionary recapitalisation is for solvent banks. For the other banks we are working with the Commission and we have already started sharing information.

What do you think about the proposal by Mr Enria, creating a European bad bank to solve the problem of NPLs?

Nouy: Well, I am grateful to Andrea Enria to have put the issue on the table because when you have such a large amount of non-performing exposures in the euro area, we need all the tools that are available. A European asset manager, European fund is another possible tool. This being said, it's not a panacea for sure; it will not fix all issues. It's just one of the tools among a few others.

The interest of having a European initiative is that it reduces the stigma for the banks and the countries using it. It is also improving the bargaining powers of the banks that are selling non-performing exposures because with the volume that we have, obviously it's a market that is favouring the buyers, not the sellers, but if we have a strong centralised seller, that is improving the situation.

This being said, I do not agree with all elements that are on the project. But it doesn't matter; it can be developed in different ways. For example, I don't think the claw-back concept is a solution because we need certainty in the prices.

Brexit questions again: is the Brexit also a concern with regard to financial stability, or is this issue completely from the table?

You mentioned the possibility of arbitrage. So how confident are you that you can really prevent the entry of a large number of unsupervised third-country branches which are significant so that this thing will be dealt with by the EU review?

Is the problem only with regard to third-country branches or also with broker-dealers which are not a bank?

Lautenschläger: Well, first of all, third-country branches are not unsupervised, just to be very precise - they are supervised. But they are supervised via a national regime and the regimes can be quite different. There are some countries which oblige banks to have capital and liquidity, to have their own risk management in third-country branches. In other member states, the same bank with the third-country branch does not need to hold capital and liquidity for the branch activities. They do not look very much into risk management issues on the local basis. There the divergence and the heterogeneity and the fragmentation come in. So that's about the third-country branches.

You are fully correct, I did not want to blur my message and that's why I deleted yesterday night my sentence about investment banking and broker-dealers. This is the third way, so you have on the one side the SSM entities, meaning directly or indirectly supervised by ECB banking supervision. Then you have the third-country branches which are supervised according to a national regime. Then you have the investment bankers, the broker-dealers – which can include a lot of bank-like business activities, which are not under the supervision of ECB banking supervision or banking supervision according to the national competent authorities, but for example under the market authorities which have a national regime again.

Here it depends, too, to be very clear even in the activities whether you are a bank or not. In Germany, for example, just giving loans means you need to have a banking license and you are under banking supervision. In other countries, giving loans is outside of the banking supervisory scope. So you have a fragmentation in the supervisory landscape where you might have a race to the bottom. We have a fragmented supervisory landscape and it is the EU Commission proposal which here and there reflects on it. It might need perhaps here and there a little bit of adaptions and amendments to get the concerns with regard to arbitrage opportunities solved.

Are you optimistic that it has?

Lautenschläger: Well, it is so obvious and so clear that there is a certain kind of gap which needs to be closed via regulation that I am positive when thinking about it. But I am not the European lawmaker; we can just hint on issues and topics and that's what we try to do today.

With regard to financial stability, I think everybody is quite aware what needs to be done on both sides of the Channel with regard to the potential transfer of activities. You can see quite clearly here now, we listed in the last month our views on back-to-back booking on local risk management and governance on the question of third-country branches et cetera. I'm pretty sure that the PRA does it on the other side, so we are very active.

You will find the overall concept in a kind of modular way in April on our website. So we will publish our positions and we prepare for the worst case scenario, all this under the assumption of a worst case for a hard Brexit. I forgot in my answer when you asked about the timing. The phase-in depends quite a lot on what kind of actual regime we will have after the end of the negotiations. So to ask now about exact numbers of days, weeks, months or years might be a little bit premature. So everybody is working on it and is quite aware.

Nouy: I would like to make one additional comment on the broker-dealer status. Right now, the PRA is deciding based on its own judgement that broker-dealers, certain of them that are systemic, can be supervised as banks. This is exactly what we need in the regulation: the possibility to decide that certain broker-dealers are systemic enough to be supervised exactly like banks. So as it is something clear, simple to do, we are quite optimistic that we will get it. It's so obvious that otherwise it would be a weakening of the supervision.

Just to come back to Brexit, could you just clarify what you mean by a hard Brexit, please? Would you be happy with some sort of regulatory equivalence?

Or would the banks need to stay under the jurisdiction of the ECJ for you to be comfortable with them still being regulated outside the eurozone and still able to conduct activities within the eurozone?

Just to follow up on that: is the position the same as what you've laid out already for clearing; what's the stance on that?

On the issue of Banking Union it seems that there are still quite a lot of elements of Banking Union that are incomplete; how does that complicate what the SSM is trying to do?

Nouy: Let me start for once with Brexit. Well, it's not up to us to say whether it should be hard, soft or in-between Brexit - that's a political decision to be taken. What is sure for us is that the UK will always be important. We will always have very important and intense relationships with our colleagues on the other side of the Channel. We have banks that are working in the UK, they will go on working in the UK. We will receive probably a number of London-based current activities.

So for us, what is important is continuity in the operation. I am sure it's the same for British colleagues and it is the safety and soundness of the framework that will take place after the Brexit. So Banking Union, maybe now for you Sabine, if you wish so - otherwise I go on.

Lautenschläger: Well, perhaps to the clearing question and the part of the Central Bank activities you ask about, we are here in the press conference of the banking supervisors. So only a very short answer, I think it is for the politicians to decide in their negotiations what kind of equivalence assessment they see fit and how the UK will move out of the European Union. We just have to prepare for the worst case scenario and hard Brexit means no passport for UK banks anymore.

With regard to your clearing questions, you know that at the end it is very, very important with regard to the clearing to keep standard with regard to the regulatory and the supervisory perspectives which are equivalent to what we have now and that is the minimum. Everything else is not yet discussed and there is not yet an official legal opinion of the ECB. Thus I will not say anything about the internal discussions.

The incomplete Banking Union: we have, I think, a well-functioning resolution mechanism, we have a well-functioning supervision. The third leg with regard to the deposit guarantee scheme has to come in order to fulfil and to have the full set, what is possible in the Banking Union. But I think with the two legs we already have now we made huge steps forward in addressing issues with regard to a level playing field, with regard to a European perspective, taking into account a perspective with high standards in supervision and in resolution activities. I will hope and would hope that we'll move forward very quickly with the third leg, too. Would you like to say something to the deposit guarantee scheme?

Nouy: Well, why not? Yes, indeed there is a good package on the table put by the Commission on reducing risk because it has been decided – rightfully so, in my view – that reduction of risk and increase of solidarity should go together. Now we have this package that can be implemented fast. We have already started with the SSM to reduce risk, reducing fragmentation, reducing national options, having a consistent SREP. But it's time to go on, indeed, and risk reduction on the third leg - that is missing - will leverage each other to deliver this safer and sounder banking system in the euro area.

From your point of view as European supervisors, how satisfied are you with the capital resources of Germany's biggest banks? Do you still see a need for further improvement?

The second question is, again from your point as supervisors, do we really need systematic relevant banks, the so-called too-big-to-fail banks, for a well-functioning banking system?

Nouy: Well, are we satisfied with the level of capital? Well, it has significantly improved. We believe that indeed taking also into account Pillar 2, the SREP requirements – or the SREP demands now – to take into account both requirements and guidance, we are in the steady state. So that's a good move forward.

The second part of your question, sorry, I missed it.

So do we really need systemic-relevant banks, the so-called too-big-to-fail banks?

Nouy: Well, we need consolidation of the banking system and it can take place within a country or across borders. I think it would make sense in certain cases to have cross-border consolidation. Obviously we have to take into account this too-big-to-fail issue. We don't want to create problems that would not be solvable, considering a too-big-to-fail issue. But there are now international standards, in particular the ones adopted by the Financial Stability Board, TLAC, capital requirements, the additional regulation for a global SIFI.

So we are well equipped also to have bigger banks, but obviously we need to be ready to supervise and we are ready to supervise these possibly large internationally-active banks. So yes, we need consolidation but obviously not to the extent that we create additional too-big-to-fail problems. But we are well equipped now to address the possibility of such problems and not increase the risk.

Lautenschläger: May I add something? I'll ask back: do you think that the export-driven industry of Germany is able to get all the financial services they need abroad in Asia, in the US, in South America, in Africa without systemically-relevant banks, because for these kinds of services you need a broad network. You need different expertise, you need economies of scale in order to give, not only well-functioning but pricely services to the industry. So what do you think?

I am not a supervisor.

Nouy: We are ready to supervise such banks and we have eight global SIFIs within the SSM which, in my view, just like Sabine said, is good for the German industry and hopefully for the other industries as well when they've recovered from the crisis.

One question on Italian banks. There are two Italian banks from Veneto - that are Veneto Banca and Vicenza - that have submitted initially a plan for a private restructuring. Then as far as we know, they have come up with a precautionary recapitalisation plan. Can you clarify a bit what the state of the art is as regards to those two banks?

My second question is on your recent statement about consolidation that in specific cases could take the form of unwinding banks if they become unviable. Does this mean in some way that the ECB supervision is intended to be a little less indulgent in dealing with future cases?

Nouy: Well, indeed it's known that these two banks have asked for precautionary recapitalisation. It's public news and we are - to be very clear - already sharing the information needed with the European Commission. You mentioned the plan they have of possibly merging. After a precautionary recapitalisation or part of a precautionary recapitalisation there is a plan to be discussed and accepted by the Commission.

So it may be that what they have developed for private initiatives is also the way it will go forward in the context of the precautionary recapitalisation. But this has to be discussed with the Commission. There is one more actor in the precautionary recapitalisation, which is the Commission that is in the driving seat for the resulting restructuring plan.

The fact that we see, well, some comments about unwinding of banks – well, let's put it in a broader context: there is a need for consolidation of the banking systems within the euro area. It's not the case in each country. There are some countries where the banking systems are already pretty concentrated. But globally there is room for consolidation in the SSM countries, in the SSM area and this can take many different ways. Hopefully volunteering mergers or concentration will be the way used to do that. But if it was happening that there was a need to use the tools that we have been entrusted to - to act in certain cases - we will not be shy in using these possibilities.

I have a question on the Basel talks. You said that we are close to a deal and that the deal can only be adopted as a package. Did you get a bit more visibility on what the US position on the whole Basel talks is? What is the reason for your optimism?

Secondly, as you mentioned Brexit concerns, are you concerned that there may be a regulatory race to the bottom as a consequence of it?

Lautenschläger: Well, first, no, I have not yet received any news from the US colleagues. But I do see that all of us are very aware that global standards, in an industry where interconnectedness is playing a huge and important role, that this awareness is there everywhere. That's why we welcome the G20 commitment so much as it even found one sentence in the declaration in there in order to ensure that everybody knows we need to move forward here. That's why I am optimistic and positive. As I know that all of the compromises are on the table, we just need to have a final meeting where we think about how we can do the one or the other thing, I just hope and I'm positive. But I cannot promise you.

About Brexit, the second question was, I'm sorry, again?

Nouy: The race to the bottom.

Lautenschläger: The race to the bottom? Well, here and there we hear from banks that the one or the other stakeholder promises fast delivery of licenses. We are always very cautious – and one should be cautious because you do not know yet what kind of range, what kind of activities, and what kind of structure a banking group will come with. So from our point of view it is at the core to have many, many different interviews, getting the business plans for several years to come. How banks want to structure their activities, how they want to grow, what kind of booking they want to do, what kind of risk management. It's nothing that you can do in a few weeks, but where you need an in-depth analysis from our point of view.

Nouy: I would add one quick point. The SSM is an asset for Brexit precisely because there is no competition in pure banking supervision. We can be neutral on the cities that will welcome these London-based banks. Obviously fragmentation, true broker-dealer status or true national, well, branches from third countries would be an incentive to race to the bottom. So that's why this fragmentation should not take place and the intermediate holding company that is on the table is the obvious solution.

Can I ask you again about the banks that you mentioned may be necessary to unwind? Are you just stating a principle or are you talking from knowledge of the situation of individual banks, talking about concrete cases – and if so, how many?

Nouy: I am talking about principles.

If you look at the health of the eurozone banking system, it's pretty striking how it seems to have improved over the past year or two. To what degree would you credit that to the broader economic recovery and to what degree would you credit tighter supervision?

Nouy: Well, I guess it's both and I hope recovery will help us to have even more success in the future. But consistent supervision, a level playing field across the 19 countries is obviously a big asset. We have the benefit of the two worlds. We have the experience and expertise of a national supervisor that is joining our efforts to deliver supervision. We have distance in the decision-making process, which is a big benefit.

We mentioned discussions with the European Commission before. We are sister European institutions. So we can promote the best interests of the Union more than if we were national competent authorities or ministries of finance in different countries.

Lautenschläger: We may be so bold to say that on average we raised the expectation of a supervisor, how high the amount of capital, how high the capital ratio should be in the banking system the last three years. That we can say, too, so it is both, yes.

Nouy: Yes and it's not only capital; it's also much easier to benchmark ourselves with the big supervisors of the planet. We benchmark our global SIFIs with the UK ones, with the US ones, for example, so we have better visibility as well.

Just an additional question on the Basel III renegotiations. Miss Lautenschläger, what do you expect or could you give us an insight where it could lead to, because most of the discussion was about output floors, it was about use of internal models.

Where could be a compromise and what would be your wish for a compromise?

Lautenschläger: I hope for your full understanding that I will not do so. Yes, you know that many, many different topics are on the table. We have operational risks, we have the standardised approach for credit risk, we have the question of the IRBA and the input floors, LGDs. We have the leverage ratio and the G-SIB factor, we have the output floor. So there are many floating topics and now it depends what the whole picture looks like. We will see what will come out of the discussions of the next six months, let us say. I will not share, I'm sorry.

Why is the ECB so keen on banking consolidation? High competition in the market is good for the customers, so doesn't the ECB like to give customers low prices?

Nouy: Well, overcapacity and competition is constraining the profits of the banks. There are a lot of new developments that are putting pressure on the profit of the bank and overcapacity is one of them. On average, euro area banks need to spend 65 cents to earn one euro; that's a lot and there is something to be done – and again not everywhere. We need enough competition, but globally and in certain countries there is an overcapacity of a ring of banking services. That is not helping the profitability and hence the solvency of the banks because those are the two sides of the coin.

Is this really the business of the ECB?

Nouy: The business of the ECB is to make sure that business models are sustainable enough. Sustainable means the banks are solvent and profitable. You cannot go on, like it is the case now, not earning the cost of your capital for long; that's an issue, yes.

Lautenschläger: You know, it is not our task to structure a banking system, but our task is to identify weaknesses and deficiencies. The core of banking supervision is to have an assessment; is the business model of a specific bank viable and not only viable at the current status today, but forward-looking for the next years? What kind of earnings can they have? What kind of risks are they taking in and are they able to cover with their earnings the risks they are taking in?

If they are not able to do so then the business model is not viable, so from our perspective it is not a question of, does the one or the other bank have to consolidate? But it is rather the question of, do we have via the overcapacity in some of the national markets a race to the bottom with regard to the margins, where the margins might not always cover the risks which the banks take and where, at the end, the question of can they cover not only the risks but the capital cost, too, is at least at stake. These are the two issues.

So we've run out of time, thank you very much for coming, everybody.

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