Introductory statements at the annual press conference on ECB Banking Supervision

Danièle Nouy, Chair of the Supervisory Board of the ECB, and Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, Frankfurt am Main, 7 February 2018

Jump to the transcript of the questions and answers

Danièle Nouy, Chair of the Supervisory Board of the ECB

What does 2018 have in store for banks and their supervisors? That is a very interesting question, but one that is hard to answer – unless you have a crystal ball. Two things seem certain, though. One, banks still face a number of challenges; and two, 2018 offers the ideal opportunity to tackle them.

There are four reasons for this:

  • First, the euro area economy is doing well, after almost five years of growth. And this growth is broad-based across both countries and sectors.
  • Second, technology is evolving, with digitalisation being the key word here. It offers banks the opportunity to raise revenues and reduce costs.
  • Third, Basel III has been finalised. So the world has become more stable for banks in terms of regulation too. Let me stress, though, that Basel III still needs to be implemented.
  • And fourth, 2018 will be the fourth year of European banking supervision; the construction phase is clearly over. The supervisory framework is now stable and predictable, and this should make life a bit easier for banks.

So, the conditions are good. Banks have made great strides and have become more resilient. The CET1 capital ratio of significant institutions increased by over 270 basis points between the end of 2014 and the third quarter of 2017, when it stood at 14.3%. We can also see that profitability is rising, although from a low level.

So things are improving, but more needs to be done. There are two things that I would put at the top of the “to do” list for a number of banks: increase profitability and clean up balance sheets. These two things are connected, of course.

Let me start with the broader issue. When it comes to profitability, European banks have been slow to adjust to the impact of the crisis. Look at banks in the United States. Compared with European banks, their profits fell more sharply during the crisis, but they have recovered faster. The return on equity of banks in the euro area has generally improved. For some banks, however, it remains very low, and this raises concerns about their ability to cover their cost of equity in the medium to long term.

The lack of profitability is indeed something to worry about, as only banks that make enough profit will be able to support economic growth and continue building up capital buffers. But the more benign economic conditions and the desire to quickly raise profits should not lead banks to embark on a search for yield either.

It is clear that banks must find ways to become more profitable without taking on excessive risks. And, of course, when it comes to solutions, one size does not fit all. Each bank has its own history and needs its own strategy. But it does need a strategy. When we look closely at successful and less successful banks, there is one thing that stands out. That thing could be termed “strategic steering”. In a nutshell, strategic steering refers to the management’s ability to set a course towards the bank’s long-term objectives; it comprises things such as efficient processes and good governance. Those banks that master it are, on average, more profitable.

Banks have to navigate through difficult territory. They need to have a firm grip on the steering wheel; they need sound strategic processes; and they need strong governance, including risk management. And here we see a number of issues in the banks we analyse.

Overall, one of the biggest weaknesses we have seen so far relates to the way in which banks put a price on loans – their loan-pricing framework. In very general terms, this framework needs to be comprehensive. It has to cover all business lines; it has to cover all relevant costs and risks, including operational costs; and it has to be group-wide.

In short, banks need to put themselves in a position to enhance their profitability. But whatever banks do to this end, they must strike a balance between risk and return. We therefore expect banks to invest in strong risk management. Banks need to cut costs, but risk management is definitely not the place to do so.

And to restore their profitability, certain banks must do more. In particular, they must clean up their balance sheets. In the third quarter of 2017, non-performing loans – NPLs – stood at €760 billion. True, NPLs have decreased over the past few years by about €200 billion. But clearly, they remain a major problem. NPLs drag down profits, they divert resources that could be put to more productive use, and they keep banks from financing the real economy. They also create uncertainty, which, indirectly, might also affect stronger banks.

Banks should use good times to reduce NPLs. And the good times are now. Carrying over the residual problems of the crisis to the next downturn is not a viable option. Once a downturn sets in, it will become much harder for banks to get rid of NPLs.

So for us, NPLs are a major issue. That’s why, last year, we published guidance for banks on how to reduce their NPLs. Moreover, cleaning up balance sheets after a crisis is one thing. Keeping them clean ahead of future downturns is another. That’s why we are working on an addendum to our guidance that will specify how and when we expect banks to provision for new NPLs.

The draft addendum was subject to a public consultation, which triggered almost 500 comments from 36 counterparties. Most of the comments related to the scope of the addendum and its calibration. We have reviewed all the comments very thoroughly. On that basis, we are now finalising the addendum.

Among other things, we will shift the date from which the guidance applies to new NPLs. We will also make it even clearer that we will follow a case-by-case approach as part of our Pillar 2 framework. We will publish the final addendum in March. So banks should get ready for it.

Banks should also get ready for the upcoming stress test by the European Banking Authority (EBA). It will be another moment of truth for them, as it will show how resilient their balance sheets really are. Moreover, as the results of the EBA stress test will be published, markets – and not just supervisors – will expect banks with capital weaknesses to address them.

Robust balance sheets are crucial for reducing risks and restoring trust in banks. This will make it easier to decide on the final pillar of the banking union: a European deposit insurance scheme, or EDIS. Over the past few years, banks have made some progress in reducing risks. In my view, we could therefore take EDIS a step further. So I welcome the latest proposal by the European Commission, which goes in that direction. What’s more, EDIS might be accompanied by another asset quality review. And that will give banks another incentive to further reduce risks.

With the single rulebook, European banking supervision and a European resolution mechanism, the banking union is now well advanced. This paves the way for a truly European banking sector. That is our vision for the future. Sooner rather than later, banks should start to reach more across borders, and reap the benefits of a large – and largely integrated – European market.

As for 2018, my message is this: conditions are as good as they are going to get. Banks should seize the moment and tackle all the challenges they face.

Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB

2018 will be the fourth year of European banking supervision. And as Danièle said, the construction phase is over; we have reached a steady state. In any case, our objective remains the same: contributing to the safety and soundness of banks.

But their safety and soundness depends on more than just good supervision. It also depends on sound regulation. And as I have pointed out many times before, in a world where significant banks are highly interconnected, sound regulation has to be global in scope. In this regard, 2017 ended on a positive note: Basel III was finalised.

This is good news for banks, because it has restored regulatory certainty. It is good news for the economy, because it contributes to a stable banking sector that can finance growth. And it is good news for supervisors, because it underpins our work with strong rules.

As a global standard, Basel III will be applied to a diverse set of banks with different business models in diverse macroeconomic and legal environments.

Against that backdrop, Basel III is a good compromise. It takes into account the differences in banks’ business models and it seeks to strike a balance between risk sensitivity and simplicity. On the one hand, banks are able to take into account bank-specific risk experience and use internal models to calculate capital requirements; on the other hand, Basel III establishes safeguards, such as input and output floors, which will prevent capital requirements from falling below a certain level. Hence, with Basel III we are not doing away with risk sensitivity. And in my view, this makes a lot of sense: risk-based capital requirements are efficient, they set the right incentives for banks’ business strategies and they prompt banks to carefully define, measure and manage their risks.

The next step is now to ensure that Basel III is fully and timely implemented in all countries. Basel III will only contribute effectively to making the financial system more stable if it is implemented in all the relevant jurisdictions.

A sound risk-based capital framework is an essential part of a stable banking system. But the internal models used by banks to calculate risks must yield adequate risk weights in the first place. And here, the ECB plays a role. As you all know, we have launched a major project to ensure just that: the targeted review of internal models, or TRIM, as we call it.

TRIM has three objectives:

  • first, to make sure that the internal models used by banks comply with regulatory standards;
  • second, to ensure a level playing field regarding the treatment of internal models;
  • third, to make sure that the results of internal models are driven by actual risks and not just by modelling choices.

As you can imagine, TRIM requires a huge effort. Still, we are making good progress. So far, half of the roughly 200 on-site missions planned have been successfully launched. The first phase of the project started in 2017 and will run until the first half of 2018. The aim is to review the internal models that banks use to assess the credit risk for retail and SME portfolios, and the internal models used to assess market risk and counterparty risk.

The on-site missions conducted so far have been useful in identifying good practices and in spotting shortcomings. The deficiencies we have found are bank-specific, but some banks have shown weaknesses, with some common patterns. For instance, for internal models used to assess credit risk, we have found shortcomings with regard to data quality, the calculation of realised losses and the treatment of defaulted exposures. But we have also observed that many banks have already invested in a relevant strengthening of the governance of their internal models and their validation.

At the same time, we are working on an update of our guide to internal models. It is based on comments received on the first version of the guide and insights from our ongoing on-site missions. We intend to seek feedback from banks on the update. The first chapter will be published for consultation in the coming months. This part of the guide will clarify general topics such as the governance framework for, and the validation of, internal models.

Ladies and gentlemen, so far we haven’t touched upon one of the biggest issues in and for Europe. This is an issue that goes far beyond the banks, but affects them as well: Brexit.

Banks must be ready for Brexit; it will happen – even if the EU and the United Kingdom have agreed to discuss a possible transition period.

Still, we cannot be sure whether the transition period will really happen.

Thus our expectations have not changed: banks must continue to prepare for any outcome, including a hard Brexit.

Any bank that wishes to relocate from the UK to the euro area should really have submitted its licence application already. But if it hasn’t, it should do so by the end of the second quarter of 2018 at the latest.

So far, eight banks have already taken formal steps to seek a new licence, and four other banks are planning to significantly extend their activities in the euro area.

We will continue to closely monitor the Brexit negotiations. Depending on how the discussions on a transition period go, we may discuss with banks whether they might be granted more time to implement their relocation plans. But we will only do this with banks that have already presented high-quality and credible plans for their steady state situation. And such a discussion will – of course – only cover those aspects that are within the scope of the supervisory authorities.

Euro area banks should also get ready for Brexit. They too should submit their licence applications in accordance with the requirements of the British supervisor, the Prudential Regulation Authority (PRA). We welcome the fact that the PRA has provided more clarity on its supervisory approach. This will help banks plan for the post-Brexit world.

When preparing for Brexit, banks should bear in mind something we keep repeating: we won’t tolerate any empty shells. Banks must be “real” banks if they want to operate in the euro area. European banking supervision will keep a close eye on how incoming banks organise their business in the euro area.

What counts for us, as supervisors, is that banks retain full control of their balance sheet risks within the euro area. Banks need to establish sufficient local capabilities in areas such as pricing, trading, hedging and risk management.

Only then can they be deemed able to conduct their European business activities adequately. This includes direct access to financial market infrastructures. Here, they must have business continuity arrangements in place to ensure access to financial market infrastructures for all relevant exposure classes.

The bottom line is that banks must remain in control of their own risks. We therefore expect incoming banks to be able to produce complete and accurate data on booking models, hedging strategies and intragroup exposures. But euro area banks should also review and disclose any changes to their booking models during the ongoing supervisory process.

Ladies and gentlemen, Brexit is just one of the many challenges that banks are facing right now – challenges that they need to address while times are good.

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Q&A

The ECB Banking Supervision is in its fourth year of active supervision, but it's also Danièle Nouy's last year and so I'd like to ask two questions; one looking back and one looking forwards. Looking back over the last four years, you and your team have turned a start-up into one of the world's biggest banking supervisors, pushed banks to hold more, and more importantly, better-quality capital. But how would you respond to the critics who say that national interests are still rife at the SSM and especially when it comes to big decisions like Monte dei Paschi and that these national interests have actually delayed and weakened your plans to tackle NPLs?

Looking forward, how confident are you that you're setting the right priorities now for the future? I'm thinking disruption of bank business models and cybercrime? And also what advice would you give to your successor?

Nouy: Well, thank you for reminding me indeed that my mandate will end by the end of the year. We have such a momentum on supervisory issues that sometimes it is as if it will last forever – or for a long time.

Well, I don't agree with the fact that we are burdened or prevented from acting due to national interest or national bias. I think the Supervisory Board has been a very disciplined Supervisory Board, really trying to deliver on the European mission and European ideals. Obviously, when a national bank is hit by circumstances or by a measure or is in a difficult situation, our national colleagues explain what the challenges of the situation are and what the limits to what can be done if we want to be successful might be. But this is very welcome. In fact, we have the best of both worlds. We have the expertise and experience of national supervisors and we have the distance in the decision-making which is helping us, both elements are helping us, to take good decisions.

If I were to give advice to our successors - because Sabine is also not staying for much longer than me - it would be certainly commitment to implement the best supervisory practices wherever they come from within Europe and to strongly adhere to the European mandate and to European ideals; to be ready to fully and totally cooperate with other European institutions that also have a mandate which goes in the same direction with ours. And certainly to have enough vigour to handle banks and withstand the criticism that goes with the job; that's the way it works. And what else? Well, persistence to make sure that what has been decided is fully implemented, but I think the list is already probably too long!

You're tackling NPLs soon enough, then?

Nouy: Well, tackling NPLs is a journey; a journey that started in 2014 with the AQR of the comprehensive assessment. Then in 2017 there was the qualitative guidance on how to address NPLs. Then we move to, what we should do to avoid a piling up of future NPLs that would turn into the legacy of the next crisis – and that's the addendum. So, the addendum is close to finalisation; we will get it out. For the stock, we have not stayed without action because at the same moment when the qualitative guidance was published, the supervisory dialogue started with the banks that were overburdened with NPLs above the average of the Banking Union as a starting point to make sure that they design their own plan to go out of their legacy issues. These plans have been challenged by the joint supervisory teams and now they are being implemented. So let's see what will be possible. I think a lot will be possible and more than what we expected when the banks designed their own plans, because precisely growth is there. We have benign economic conditions.

My first question is a follow-up on NPLs. You've said that individual plans for NPL reduction are being examined. Some banks and most recently Intesa Sanpaolo yesterday said that this has resulted effectively in the ECB putting pressure on them to offload NPLs as opposed to working them out internally. Can you just give us an update on how your assessment of individual plans is going, whether you're happy or unhappy with them and so on?

And the second question is about Banco Popular Español. Last year in this same press conference you praised Banco Popular for being brave and coming out to the market saying that they need more capital. That didn't quite work as perhaps people were hoping, so what lessons can be learned from Banco Popular?

Nouy: Well, regarding the plans of the banks first, the plans have been sent about a year ago to the JSTs. They have been challenged; sometimes the banks have produced a second plan which was more precise, either more ambitious or more credible or both. This is work in progress and indeed a number of banks are changing their policy, using the good times to do what they can do, more than they had planned to do at the beginning. This is what, in my view, good supervision is about: to make the banks safer and stronger when this can happen.

Regarding the praise for Banco Popular or others for getting more capital, in fact there is a principle: capital is always music to the ears of supervisors. Obviously more good-quality capital for weak banks obviously is a positive point. But there is also a risk, which is to do too little, too late. If this is considered by investors too little, too late, it's not necessarily helping the bank through the future. The advice again is for the banks to do what they have to do at the right moment. This being said, if you read the information which is available regarding Banco Popular, there are a number of public elements like a change in the rating, like a need to correct the accounts at the end of the year that were not fully correct and so on and so forth. It's not about just asking for more capital at a different moment. It's accumulation of a number of elements that were not good.

Lautenschläger: Well, lessons learned are always very bank-specific and I beg for your understanding that we cannot talk about single cases in a very detailed fashion. But perhaps in an abstract fashion I can tell you. We again experience that we have very different tools to react as a supervisor. Here I go back to my request not only for good supervision, but a request for good regulation. I think here some work still needs to be done by the European and the national lawmakers. We do have very different standards being applied to banks, for example in large exposure rules, because there is still very different national legislation around. We do have different tools as a supervisor. In some countries we can use a moratorium in order to stop a liquidity drain on a bank. In other countries we cannot use this because we do not have a moratorium. Here we still wait for a lot of work which has to happen on the harmonisation of regulation.

Last week the SRB published a more complete non-confidential version of the Banco Popular evaluation report. According to the resolution authority it was the ECB that asked not to disclose some points about ELA and liquidity outflows. Do you agree with that statement? Why did you decide not to publish all the information?

Lautenschläger: We do have a very strict confidentiality obligation given to us by the lawmaker. We are allowed to know everything with regard to a bank. This is the one side. And in order to balance this broad information possibility, the lawmaker gave us a confidentiality obligation too, meaning that we are not allowed to publish something on a specific bank if we do not have its consent. This is the information I am talking about with regard to the supervisory process.

Coming to the ELA process, let me remind you – and here again I am not allowed to give you individual comments –that ELA is a national task. ELA is given by the national central Bank. If ELA moves beyond a certain threshold then the ECB, the Governing Council, is asked whether there is any objection to this, objections which have to be based on monetary policy grounds. This decision is a case-by-case decision, this kind of objection or non-objection. Here the first question I would ask, I would relate it to the national central bank because there is the source of a decision. The second one is then a very, very bank-specific discussion which we do not comment on.

There were some reports in Greek media that the trigger of recapitalisation will be 6% to 6.5% under the adverse scenario. Could you confirm that?

My second question: why don't you use the upcoming stress test for another capital increase so that the Greek banks can clean up their balance sheets from their huge NPL pile once and for all?

Nouy: Well, as you have two questions, I will start with the first and let Sabine respond to the second. It's not a pass/fail stress test exercise, which means that there is no particular trigger. The need for possible recapitalisation for all the banks, the Greek banks just like the other banks in the EBA stress test, will be decided on a case-by-case basis by the Supervisory Board. That's the situation, nothing else. So no need to discuss percentages that may be relevant for one bank and not for the others, and which do not make sense to be implemented for both baseline and adverse scenarios for certain banks. So, on a case-by-case basis and a Supervisory Board decision.

Lautenschläger: Just to give you an idea why it is a case-by-case decision. The EBA methodology is a methodology which will be applied to about 50 banks, if I remember correctly. It will be about 37 SSM banks. It has to be a one-size-fits-all methodology. The outcome and the question of what you have to adjust in order to take into account very bank-specific facts like restructuring, like already agreed upon contracts to sell this or that, but which were being not taken into account until the end of last year. These kind of facts we have to take into account when deciding whether a bank needs more capital or not. That cannot be taken into account in an EBA one-size-fits-all process. So, it is very relevant that you take this kind of case-by-case decision before you move into a very bank-specific individual decision as a supervisor. Otherwise we would set rules – which we do not do; we have bank-specific measures.

Now, the second question; let me be very abstract because we have not yet started the stress test and you are already asking me about the results and their consequences. I don't have a crystal ball so I do not know the outcome yet. But what we for sure need to do is to ensure equal treatment for all the banks which might need additional capital. That means that we have to look into the bank-specific risk profile and then we have to see, what kind of requirements we set for the SREP and for the capital add-ons. Then we will see what will happen.

You said that there will be a new date for entering into force of the NPL addendum. Does it mean that it is going to be delayed and what is the new date?

Nouy: Well, it has already been delayed because it was said in the consultation paper that it will be implemented by 1st January, so it is delayed. As soon as it is published you can expect that it will be implementable, but it's a decision to be taken by the Supervisory Board. I know that the date of 1st April is a possibility but not yet decided, so it has already been delayed. It's not a piece of news; it was supposed to be 1st January.

Just to return to the point about there being national interest. Some people would see this delay on the addendum of how to treat new NPLs as a classic example of those national interests superseding those of the region as a whole. What would you say to that?

At the time when the addendum was originally discussed, there seemed to be some hints that there were going to be tougher measures taken on the stock. Has that now been shelved, or is that still something that you'll look at, once this delay is overcome?

Nouy: Well, I will not call it national interest but normal human beings' reactions that countries or banks that can be hurt by a measure are the more vocal about the possible consequences. Well, it's almost normal, as far as I am concerned. We are able with all these explanations to do the good thing, including, in particular, explaining that the addendum is not a binding instrument, that it is the starting point of the supervisory dialogue, that it will be implemented on a case-by-case basis and so on and so forth. I think this is useful clarification.

As far as the stock is concerned, this is a work in progress. There was not even a first meeting of the Supervisory Board on the issue, so let's wait for what will be decided. The two documents are at different stages. On the one side, we have the addendum that is very advanced in its finalisation and for which the publication can be expected by mid-March. We coordinate this with the European Commission that is also going public by the same time. For the stock, that's still to be discussed and decided by the Supervisory Board.

Also on NPL you said yourself the stock is still high and there's no decision on how to deal with it yet. How, then, can you convince countries with a relatively low stock that time is right for EDIS, as you say?

Lautenschläger: First of all, let me tell you very clearly: we are doing a lot of work on the stock. It's not that we are lenient there; on the contrary. I think we can take a little bit of the praise when looking into the reduction of the stock: in the last three years €200 billion that part of it is a result of our constant pressure and our constant request for working on the stock.

I'd like to use the chance perhaps to add something to a former question. We are not pressing banks to sell NPLs. There are all kinds of different tools to reduce the legacy issue you have. It's not only about loading them off to a third party. This is sometimes a little forgotten because everybody only talks about the sale. It is very important to have a good workout in a bank. You can earn quite a lot of money by having good strategies there, competent people, highly-qualified people, I can tell you. Very essential is also that the governments, that the countries, ensure that they have a legal and judicial environment where you can have a quick workout. The quicker the workout, the higher the value of the NPL, the better banks can draw upon collateral and have recovery rates which are relevant for their capital, for their provisioning level.

To come to your EDIS question, working on the NPLs is one of the major tasks with regard to supervision when talking about risk reduction. When you hear discussion about EDIS, it is always a discussion between risk reduction and risk sharing, which have to be balanced and have to be looked at, at the same time. A banking supervisor is part and is supposed to be part of the risk reduction. NPLs are one big issue but there are other issues, too; it's not only NPLs. I know that this is the sexiest thing right now for you, but let us not forget that we have many, many banks in the euro area which do not have to do a lot of work with regard to an NPL stock, but which might need to do work on their business model, on their profitability, on their risk management, on cyber risk. This is part of our work, too. With our priorities I think we have a very good grasp on all kinds of issues.

You were talking about risk and NPLs. What do you say to those critics who accuse the Supervision for focusing too much on NPLs and for not taking into sufficient account derivatives, for example?

Nouy: Well, we look at all risks. We assess all risks and we try to get mitigants for all risks. About the comparison which is made quite often with these Level 3 or Level 2 assets, let me say that we are conducting rigorous reviews of valuation on pricing models for market risk. We investigate market risk aspects both in internal models, in off-site supervision and in on-site supervision with missions. Those risks are taken into account in the SREP methodology. We have also horizontal benchmarks that are used for this kind of risk. Also it is part of the capital surcharge for global SIFIs. It's even part in two boxes, two elements, two criteria of the global SIFIs methodology. One is the complexity element and one is the resolvability element. So it is covered, in my view, and we will certainly not stop covering it because those are important elements and important risks. We think that we are looking across all risk for all banks.

Lautenschläger: In a nutshell, it is a fairy tale that we are not looking at derivatives.

Do you have figures about derivative business of the banks?

Nouy: Of course we have plenty of figures regarding the derivative business of all the banks that are in this business Yes, of course.

Lautenschläger: But you know it is a fairy tale too that all derivatives are very risky; there are very plain vanilla derivatives which are more or less alone. Then there are very complex ones where you really need to look at it in detail. We are monitoring and we are assessing and examining on-site and off-site thoroughly the banks which are doing business in this perspective.

I would like to ask you whether you are satisfied with the reduction of NPLs in Greece especially through the auctions procedure, which seems to be lagging. Should the price of collateral sold through auctions be considerably and consistently lower than the value recorded in the books of the banks, would you ask Greek banks to take provisions?

Nouy: Well, we are indeed satisfied that the movement has started and that good efforts are made and that they start bearing fruits. But this is not the end of the task and a lot still has to be done.

Regarding electronic auctions, it is true that they have been delayed for some time. But I am told – and I believe that it's correct – that they have already, even before having been used, produced some effects. Because you have one category of defaulters with unpaid loans, who are, what we call in our jargon, strategic defaulters. Strategic defaulters don't want to discover one day that their property is on sale in an electronic auction; so they can pay, they should have been paying and they are ready now to pay under more normal conditions. Sometimes the momentum is already delivering some good developments.

Well, whether the prices are too low compared to current provisions, obviously if the solution picked up is the sale, indeed we look to see if the plan is credible. We look at the level of provisions and the level of solvency that you have when you are selling. To be credible you have to be able to take the loss.

But as Sabine has said, and very rightfully so in my view, is that sale is only one of the elements. She quoted a number of other possible solutions. I would even add one more, which is restructuring the loans early enough in the life of the loan to make them performing. At this moment, maybe the bank has to give up something, some interest for example. But it's really little compared to what happens when you are not addressing the issue at the beginning.

I would also take this opportunity to say something that has not been said yet regarding non-performing exposures. Non-performing exposures is a problem that goes much beyond supervisory action. There is something which is very important, which is the efficiency of the legal proceedings, the efficiency of the legal framework. This is a very important element for the price of the NPLs. If there is certainty on the length of the legal proceedings, if there is an efficient legal framework for repossessing collateral, then the price of the NPLs can go up in significant proportion. That's why a number of countries – almost all the countries that are burdened with NPLs – have taken action to change the legal framework and make it work better. All those initiatives are going in the same direction; making banks safer and sounder in this respect.

Lautenschläger: But we have to stay on track. So doing it one year only is not sufficient; we have to move forward and make progress.

Given that Basel III has been sorted and with the continued pressure on profitability, is it your expectation or – and hope - that 2018 is going to be a year we're going to start seeing some cross-border consolidation in the banking system? Based on your conversations with banks, are you getting an impression that that's something that can possibly happen this year, beginning this year?

Nouy: Well, I can start on this one by saying that a number of European banks are not earning the cost of their capital, so obviously something will have to happen. One of the solutions for that is consolidation of the banking sector. I hope that this will happen sooner than later. Will it be immediately cross border? It remains to be seen. Sometimes there are also national synergy models that are making a lot of sense and we have seen a few of them already like Popolare Milano and Popolare. So I think these will go on. Personally, as a supervisor I think we have – and this is something I will express and we will express to the legislators - to be more open-minded regarding, in my view waivers, cross-border waivers for liquidity and capital. We see in the Banking Union because I think it should be considered a single jurisdiction. All the information regarding the SSM banks is on the table to all members so they can be actors in the supervision. So I hope this will develop. I have seen recently a letter from a number of big banks within the SSM asking the legislators to be more open-minded regarding these cross-border waivers. I must say I agree with what they are requesting.

You say that you are coordinating with the European Commission on the NPL issue and the addendum. I would like to ask, what about the European Parliament and the European Council because of the fact that the legal services of these institutions have said that the SSM has gone beyond its mandate with this addendum. Will the final version of the addendum give an answer to the complaints? Or will it be simply a statement that you act within your mandate?

If possible, just a question on the stock market; we have just seen an abrupt volatility episode. With the information you have available now, do you feel confident that the European banks would be able to cope with a correction similar to the one that is foreseen in the new stress test?

Nouy: Regarding the European Parliament that you mentioned, I have regular hearings with the ECON committee. I am very glad to have this opportunity to listen to what the members of the Parliament have to tell me and to respond to their concerns or explain what we are doing. The next one will be in March on the occasion of the issuance of the annual report.

Regarding the legal concerns that were expressed, well, I can tell you we have put the best legal brains of the SSM and the ECB to make sure it's absolutely clear that it's not binding, it's part of the supervisory dialogue, it's case by case. Well, I think all the conditions are met. Let's see whether it is clear.

Lautenschläger: I think we had a misunderstanding here and I think we explained very clearly where our legal basis is, why we are doing what we are doing. There are in the CRR and the CRD IV very clear paragraphs which say that we have to assess not only the credit risk methodology, but the provisioning methodology too. The EU Commission confirmed that with this assessment that this assessment can result in deductions, in measures of the supervisor out of prudential perspectives beyond the accounting perspectives if we think that there are additional risks which need to be covered out of a prudential perspective. There is a very clear obligation of the SSM to look into the provisioning methodology. As we are asked by the European Parliament, by the European Court of Auditors and by many others, to explain what the basis of our assessment is, we publish the addendum. This is the basis, the starting point and on this basis we discuss with the banks whether their risks are different from our starting point, from our basis. Then we decide case by case, so no automatism, no binding thing. But rather fulfilling and complying with the request of the European Parliament and the European Court of Auditors to be transparent in our assessment methodology used for fulfilling our obligation according to the CRR and the CRD IV.

The answer to the stock market question is that we do not comment on single fluctuations of the stock market. As a central bank as well as a supervisor, first you have to look into the facts and the reasons et cetera before you say anything to the public, as a supervisor and a central bank.

I would like to know about this EDIS proposal and the AQR: is this a proposal of the SSM, the ECB or just an idea or a decision?

Second, until when with Brexit, if we have a hard Brexit, do banks have to decide if the clearing business has to be moved to other places than London. Is it end of the year or March or what?

Nouy: Well, regarding EDIS and this possible AQR, it's in a document published by the European authorities, the Council if I remember well, that mentioned the possibility of having an AQR, yes. It's not a request from us, or we have nothing to do with it; we just found it in the European authorities document.

Lautenschläger: Well, let us wait for the negotiations. There is still more than one year left and we will see what kind of framework we will have around it. In the next press conference we can come back to your question. I don't have a crystal ball with regard to the negotiations. I am talking about continuity arrangements, meaning to have a plan to have looked into what kind of possibilities, what kind of alternatives we have and what kind of process we have to look at and to fulfil in order to come to a certain result.

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