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Second 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, 9 November 2017

Mr Chair,

Honourable Members of the Parliament,

It’s a pleasure to discuss with you today the work of ECB Banking Supervision. In my introduction I will focus on four topics: first, the Commission’s review of the SSM Regulation; second, non-performing loans; third, the supervisory preparations for Brexit; and fourth, the results of our 2017 supervisory stress test.

Review of SSM Regulation

Let me start with the Commission’s review of the SSM Regulation. We welcome the Commission’s positive assessment, in particular the observation that, since the SSM took up its work, the effectiveness of banking supervision has improved in the euro area and the supervisory framework for significant institutions has become more harmonised.

Although the assessment is very positive, the report obviously includes some recommendations for improvement, which we are now carefully considering. As some of these recommendations refer to the functioning of the SSM in a more general sense, or because their practical implementation would have operational or legal implications, our assessment is still ongoing.

Non-performing loans

Let me now turn to the topic of non-performing loans or NPLs. NPLs weigh on banks’ profits, which is unfortunate at a time of already weak profitability. More importantly, NPLs hamper banks in providing new loans to the productive part of the economy, which is weighing on investment and hence on economic growth.

Against this background, addressing asset quality has been one of ECB Banking Supervision’s key priorities since its inception. Our approach to the problem has been genuinely euro area-wide, aiming for a level-playing field across the banking union. Indeed, in banking union, banks should no longer be treated on the basis of their nationality, even though they continue to be impacted by national legislation.

As a first step, we published the qualitative NPL Guidance in March 2017. In line with this Guidance, banks were asked to adopt ambitious, yet realistic and hence credible, strategies for tackling NPLs.

Our supervisory initiatives have started to bear fruit. Over the last year, we have seen significant institutions make considerable efforts to reduce their stock of NPLs across euro area Member States, bringing them down by €142 billion to €795 billion in the second quarter of 2017 compared with the same quarter in 2016. Of course, in many cases further work is required.

In line with its mandate, the ECB needs to take a forward-looking approach in proactively addressing risks while learning from past experience. Since publishing our Guidance to banks on NPLs, we have continued to work on further measures to address the NPL issue. We have always been very transparent about our work in this area. On launching the consultation on the draft guidance in September 2016, we already announced that our work on NPLs would not be finished and that we would put increasing focus on timely provisioning practices as a next step. It is clear that we cannot only focus on the existing NPL stock, but that we need to ensure that a similar build-up of NPLs will be avoided in the future. Now is the right time for such an additional step given that we currently have very favourable economic conditions in Europe. We need to exploit this momentum by taking forward-looking actions now, during these increasingly good times.

We accordingly came forward with a draft addendum to our NPL guidance that was published for consultation on 4 October. By providing credit institutions with the ECB’s supervisory expectations for addressing new NPLs, it aims to foster more timely provisioning practices for new NPLs from 2018 onwards and avoid a renewed increase of NPLs in the future.

The draft addendum proposes that unsecured loans be fully covered after two years of being classified as non-performing. For secured loans, the proposal would be a 100% coverage after seven years for loans which are classified as non-performing. The expectations would be applicable to all new non-performing exposures classified as such after 1 January 2018.

Let me stress that this addendum, once adopted, falls within the supervisory mandate and powers of the ECB. Indeed, it is a Pillar 2 tool, because it only foresees appropriate supervisory measures after a case-by-case assessment. There will be no automaticity. The addendum merely clarifies, in the interest of transparency and for level-playing field reasons, what our supervisory expectations are as regards the provisioning of new NPLs. Both banks and other stakeholders have regularly asked us for such clarification.

Since our inception, we have been transparent about our supervisory expectations on various topics, including in non-binding quantitative form. Take for example the ECB’s recommendation on dividend distribution policies.

Our interpretation that the proposed addendum is an institution-specific Pillar 2 tool was recently confirmed by the European Commission. Had this not been the case, it would have meant that the SSM – unlike the other significant supervisors in the world – would have been deprived of the tool for expressing supervisory expectations on such a key vulnerability for the European banking system.

As also reported by the Eurogroup President in his press conference on Monday, there was general support in the Eurogroup for our approach.

The draft addendum is also in line with the Council Conclusions on NPLs which were adopted in June. Indeed, the Council stressed that incentives for banks to deal with NPLs should be enhanced, and the draft guidance goes precisely in that direction.

Let me finally also remind you that we, in the interest of transparency and in order to gather the input from stakeholders, have not yet taken any decision other than to launch a public consultation on the draft addendum. This public consultation will run until 8 December 2017, and the ECB will carefully consider all comments received before finalising the draft addendum.


I now turn to the preparations for Brexit. Since the UK’s decision to leave the European Union, the SSM has been in continuous dialogue with several banks that are affected by Brexit. Almost 50 banks have directly approached either the ECB or the national competent authorities, NCAs for short.

Several, especially the larger international banks operating in the euro area via the United Kingdom have progressed on their contingency planning. A few banks have indeed already submitted formal requests for licensing or for extension of license applications, which are currently being assessed by the ECB and NCAs. However, the ECB is concerned that many banks are still delaying their final decisions on restructuring their operations, with a view to keeping their options open.

In assessing the relocation plans available so far, the ECB has identified some deficiencies, especially regarding the tendency to set up “empty shell” banks in the banking union, overly relying on services provided by group entities in the United Kingdom.

Additionally, we see a tendency to relocate bank-like activities to investment firms or third country branches which are out of the SSM’s scope, thus leading to a fragmentation of supervision and possibilities for regulatory arbitrage. Here we rely on you as European legislators to introduce the necessary changes to the prevailing regulatory framework.

Significant euro area banks with a UK-footprint are also progressing in their preparations. Nevertheless, the ECB sees a need for stepping up these preparations and will continue to push banks to do so.

Interest rate risk in the banking book (IRRBB) sensitivity analysis

We have recently completed the sensitivity analysis of interest rate risk in the banking book – our 2017 supervisory stress test. As last year, the bank-specific results of this stress test were used as an input in determining the SREP decisions.

The detailed results have been published on the ECB Banking Supervision website. They delivered three broad insights that I would like to share with you.

First, banks’ exposure to interest rate risk appears contained overall; on average, a sudden increase in interest rates would have a positive impact on net interest income and only a mildly negative impact on the net present value of the banking book. It is also important to note that euro area banks are in very different situations with regard to the interest rate risk in their banking books, which is comforting in the light of a potential concentration of risks.

Second, this overall finding, however, relies on the reliability of the banks’ assumptions about customers’ behaviour that may be challenged in the future. For example, banks usually assume that retail deposit costs will remain stable, even if interest rates increase sharply. However, these assumptions were often based on depositors’ behaviour in a period of declining interest rates; bank customers may react differently when interest rates increase. We are now holding in-depth dialogues with individual banks to further assess their practices.

Finally, the exercise also confirmed that banks make significant recourse to interest rate derivatives not just for hedging – as we would expect – but in some cases also to strategically position their balance sheet in a certain way. Our priority is now to assess banks’ risk taking and to ensure that banks have a robust risk governance framework around these trades.


Let me now conclude my introductory remarks and thank you for your attention. I now stand ready to answer the questions you may have.


European Central Bank

Directorate General Communications

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