First ordinary hearing in 2017 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 June 2017

Mr Chair,

Honourable Members of the Parliament,

I am glad to be back at the European Parliament to address you on a number of very topical and important issues for banking supervision in Europe. In my introductory remarks, I will discuss the supervisory implications of Brexit, as well as some crucial issues in the risk reduction package which is currently under discussion in the Council and here in the Parliament. Let me start, though, with an update on our work regarding non-performing loans.

Non-performing loans

The quality of banks’ assets continues to be a serious challenge in the banking union as a whole, but the problem is also concentrated in certain countries. Large volumes of non-performing loans, or NPLs, are contributing to low bank profitability and making banks less able to provide new financing to the real economy. As supervisors we have therefore paid considerable attention to the NPL problem since the start of European banking supervision. In March of this year, following an extensive public consultation process, the ECB published its guidance on NPLs, which is applicable to all significant institutions. This guidance requires banks with high levels of NPLs to implement ambitious and realistic strategies for reducing the level of NPLs in a timely manner. This supervisory initiative has already started to bear fruit across banks and countries. In recent months we have seen a number of banks starting to address their asset quality issues much more actively. Our efforts in this area will continue. Our supervisory teams will closely monitor and challenge banks’ NPL strategies as well as the way they are implemented.

Furthermore, we are looking into more forward-looking solutions to avoid any such build-up of NPLs in the future. One important condition for ensuring a reduction of NPLs and preventing their future build-up is for supervisors to have sufficient powers to ensure that banks make timely prudential provisions for losses resulting from NPLs. We have highlighted the need to strengthen such powers already to the Commission and the Council and to your Committee most recently during the hearing on the banking legislation package in May.

I would also like to stress that addressing NPLs requires determined action from all stakeholders, not only supervisors. In addition to our work, legal and institutional measures are required, notably in the areas of insolvency and judicial processes.

Brexit

Let me now turn to the preparations for Brexit, which are currently an important part of our work. Since the 2016 vote by the United Kingdom to leave the EU, the ECB has been preparing for the consequences of this decision. First, we are making sure that euro area banks, in particular those with subsidiaries or branches in the United Kingdom but also those with other business ties to the country, have adequate contingency plans in place and are preparing for the possibility of a “hard Brexit”. Second, within the ECB we are preparing for all operational aspects related to a possible relocation of UK-based banks to the euro area. In particular, within the scope of our responsibilities we are making sure that banks which relocate from the United Kingdom to the banking union are treated equally, irrespective of the location they may choose, and that there is no leeway for arbitrage between supervisory approaches. For this reason, we have agreed on policy stances to ensure the consistent treatment of international banks relocating activities to the euro area.

However, there are limits to what the ECB can do, and we are concerned about that. Regulatory differences arising from Member State options and discretions in the European prudential framework persist, and may now have a substantial impact in the context of Brexit. Furthermore, banks coming to the euro area may exploit supervisory loopholes by carrying out bank-like activities through an investment firm or third-country branches, both of which are not supervised at euro area level, but rather at national level.

While banks take various factors into account when deciding where to locate and how to structure their operations, the fact that the fragmented regulatory and supervisory framework in the EU may play a role in their decision-making is highly undesirable.

The ongoing CRR/CRD review gives legislators an opportunity to close existing loopholes and enhance convergence. One example is the intermediate parent undertaking proposal, which would be a good tool for bringing certain third-country branches of international groups under European banking supervision. Another issue is the supervision of large investment firms, in particular those that may pose systemic risks. These firms conduct a range of complex activities that are similar in many ways to those conducted by some banks. Supervising these entities as if they were banks makes a lot of sense, as there are substantial synergies in supervising wholesale market activities in banks and large investment firms within a peer group. This is established practice in the United Kingdom and the United States. We should therefore pursue European banking supervision for such entities.

Key issues of the banking legislation package from the supervisory perspective

Let me now turn to the Commission’s proposal on risk reduction (that is the CRD/CRR/BRRD/SRMR package). As we have already discussed this previously, let me be brief and focus on our key concerns.

• First, although we agree with the need to fast-track the provisions introducing a transitional framework for IFRS 9, we strongly believe that the phasing-in should follow a simple static approach that only affects the initial CET1 capital reduction. We are therefore concerned to see that the Commission proposal and the ECON Committee draft report provide for a dynamic approach, which would make the transitional arrangements much more complex and burdensome. Furthermore, this approach would de facto postpone the entry into force of the whole IFRS 9 framework, as it would require banks to continue calculating their provisions and making subsequent adjustments to CET1 capital according to the previous accounting standard for the entire transition period.
• Second, it is important to ensure that supervisors keep the necessary flexibility in their toolkit to perform their tasks and address the idiosyncratic risks of institutions. Against this background, the Commission proposal on Pillar 2, while rightly seeking to strengthen supervisory convergence, frames supervisory action much too tightly in essential aspects.
• Third, the proposal does not provide for an adequate harmonisation of certain key supervisory tools at EU level. These are mainly the powers to make certain deductions in capital to properly address risks which are not fully covered by the accounting rules. This is especially relevant to adequately address the issue of non-performing loans, as I mentioned earlier.
• Fourth, the proposal lacks ambition in terms of further harmonising the EU prudential framework. We think that much more progress should be made in harmonising Member States’ national options and discretions. We hope that this will be achieved during the negotiations. Here, the Parliament could play a key role.
• Fifth, we support the simplification of some rules for small banks, such as those on disclosure and remuneration. But, supervisors should retain the flexibility and discretion to apply regulations with proportionality. We should maintain the single rulebook and level playing field, and hence it is preferable not to create a separate regulatory framework for small banks. It would not only be difficult to properly define the concept of small banks, but also small banks can pose high risks to unprotected depositors, and to the system as a whole, as they can be “systemic as a herd”, as was noted during the financial crisis, for example for the Spanish cajas.
• Sixth, we support the proposal to grant capital waivers within banking groups operating on an EU cross-border basis. This will allow for more efficient management of capital across the EU. We are convinced that the banking union allows for these waivers to be granted inside the SSM without creating additional risks to financial stability.

Conclusion

Let me now conclude. By continuing intensive work on our supervisory priorities, ECB Banking Supervision is contributing to the mitigation of existing risks and enhancing the soundness of the euro area banking system. In doing so, we cooperate closely with regulatory and supervisory bodies at European and national levels and fulfil our mandate as a truly European supervisor. However, we are not yet where we would like to be.

First, a number of banks still need to take swift and decisive action to improve their asset quality and ensure they have credible business models and governance structures to be able to successfully operate in today’s quickly changing environment.

Second, legislators at EU and national levels need to take further steps towards a regulatory framework that is harmonised and offers the right tools and the needed flexibility for supervisors to act swiftly when necessary.

Thank you for your attention.