First ordinary hearing in 2018 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 2018
Honourable Members of Parliament,
As always, it is a great pleasure for me to speak to you today, hear your questions and concerns and discuss the work of ECB Banking Supervision. In my introduction I will focus on our work on the targeted review of internal models, the ongoing EBA stress test, cyber and IT risks, Brexit and key legislative files. I will also briefly update you on our progress on non-performing loans.
Targeted review of internal models (TRIM)
We have made significant advances in conducting our targeted review of internal models, or TRIM for short. With about 200 on-site investigations planned for 2017-19, the project aims to assess the adequacy and appropriateness of banks’ Pillar I internal models and reduce unwarranted variability of risk-weighted assets across banks.
Mid-way through the exercise, TRIM has already produced meaningful results.
First, it has promoted a common understanding among banks under our supervision of the applicable regulatory requirements for internal models and of the common set of supervisory expectations across the euro area, as explained in the dedicated guide published on our website.
Second, thanks to the use of a harmonised set of methodologies and tools, TRIM enables us to conduct horizontal analyses and peer comparisons to detect recurring shortcomings vis-à-vis regulatory requirements.
Finally, on the basis of the TRIM findings, we have started to take institution-specific supervisory decisions, ensuring that banks correctly and consistently implement regulatory requirements for internal models.
Work on the 2018 EBA stress test
We are also making good progress on this year’s stress test. Its objective is to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of banks and the banking system to certain shocks, and to challenge the capital position of banks.
To this end, the stress test focuses on the impact of an adverse scenario on the solvency risk of banks, particularly on credit risk, including securitisations; market risk; operational risk, including conduct risk and finally, net interest income and net fee and commission income.
Let me emphasise that the stress test is not a pass or fail exercise. Its results, together with other relevant supervisory information, are used to form an overall supervisory assessment of the banks’ situation. For the 33 euro area banks included in the EBA sample, the results will be published on 2 November of this year.
For the Greek banks, the stress test has already been completed. The exercise applied the same methodology and approach as the EU-wide EBA stress test but was conducted under an accelerated timetable, ahead of the conclusion of the third economic adjustment programme for Greece.
The results of the 2018 stress test of Greek banks showed an average Common Equity Tier 1 capital depletion of 9 percentage points (equivalent to €15.5 billion) under the adverse scenario. This depletion was mostly driven by the shocks applied to credit risk parameters and net interest income.
On the topic of cyber risk, we very much appreciate and welcome the various national and international efforts to raise awareness. There is broad agreement that banking is becoming more and more digital, and that digitalisation – together with the evolving cyber threat landscape – poses significant challenges and risks to banks. Think of the expanding interdependencies with external IT service providers, the growing sophistication of cyber threats and the scarcity of cyber expertise.
Since the inception of European banking supervision, IT and cyber risks have been among our focus areas. We continue to insist that banks also prioritise these risks and maintain a high level of “IT security hygiene” and vigilance. In general, the banks we supervise are aware of the risks and are improving their defences and reacting to emerging threats. However, this is not to say that banks are safe or immune. Banks and supervisors alike should realise that they are never done addressing cyber risk.
Let me now turn to Brexit and the current state of the preparations. Most banks under the ECB’s direct supervision are progressing in their work to adapt to a post-Brexit environment. More specifically, they have started the process to transform their UK presence and obtain the necessary authorisations from UK authorities, following the ECB’s detailed review of their plans as their home supervisor.
For banks which are relocating to the euro area and have not yet applied for a licence, time is clearly running out. The ECB had asked banks to submit applications before the end of the second quarter of 2018 at the latest to allow timely licensing. Banks which have not submitted complete applications of high quality until then need to be aware that they may not be licensed in time for Brexit.
Looking forward, we will continue our work on the assessment of banks’ plans and will closely monitor their implementation so as – among other things – to counter the setting up of empty shell entities without adequate local capabilities to run their business.
Key legislative files for the banking union
Let me now turn towards some key legislative files for the banking union.
In our view, significant risk reduction has been achieved. Thus we should now unlock negotiations on a European Deposit Insurance Scheme and work towards operationalising the common backstop to the Single Resolution Fund.
More specifically, on the banking package, given the importance of concluding this package in time, I welcome that the Council adopted its general approach in May and I am now looking forward to the adoption of your reports [on the CRD/CRR and BRRD/SRMR review].
It would be important that trilogues start soon with a view to adopting the package well ahead of the European elections in May next year.
As regards the review of the minimum requirement for own funds and eligible liabilities, or MREL for short, I share many of the positions adopted by the Council, such as the deletion of the MREL guidance and introduction of adequate transition periods for compliance with the MREL requirements. The review of MREL will help to ensure resolvability and advance the shift from bail-out to bail-in. However, there are some aspects on which I would welcome further reflection in the course of the trilogue. One such aspect is the possibility of allowing internal MREL to be waived for subsidiaries within the banking union, as there is a single supervisor and a single resolution authority. Provided there are adequate safeguards guaranteeing support from the parent to the subsidiary, internal MREL waivers will allow for more efficient allocation of resources within a banking group. This will have a positive impact on the real economy and the profitability of the banking system. For internal MREL waivers to work, the unobstructed flow of capital and liquidity in a resolution situation will be required, reflecting the singleness of the banking union.
For the revision of the Capital Requirements Regulation and Directive, I note that some of the proposals under consideration contain deviations from the Basel standards. I am referring for example to the proposed changes to the Basel methodologies for calculating the leverage ratio and the net stable funding ratio. I believe that these deviations should be limited to ensure regulatory alignment and a global level playing field. On the flexibility for supervisors to set bank-specific requirements, it is important that supervisors can decide on all the main features of these requirements, such as capital composition. More generally, I would welcome further progress in harmonising the European prudential framework, for example by further reducing unwarranted national options and discretions and by regulating at European level certain supervisory tasks that are currently carried out under national law, such as fit and proper assessments. We would also welcome greater convergence of national insolvency frameworks. All of this would further enhance the level playing field and ensure the effectiveness of the supervisory and resolution framework.
Currently a significant number of complex firms are planning to establish themselves in the EU as investment firms following Brexit. This is also why I strongly support the Commission’s proposal to ensure that systemic investment firms posing increased financial stability risks, as well as an increased risk of spill-over effects on other credit institutions, are to be subject to the same regulation and supervision as credit institutions. This approach is similar to that in the United Kingdom and in the United States; it prevents supervisory fragmentation; and allows supervisors to draw on significant synergies from supervising certain cross-border activities across the financial sectors.
NPLs and conclusion
Let me now conclude by briefly touching on our work on non-performing loans, which was and still is a very relevant topic for the European banking system, although significant progress has been made thanks to the hard work of supervisors. (In fact, more than 60% of the total NPL reduction over the past four years was achieved in 2017.)
As you know, we published our final NPL Addendum in March and this clarification of our supervisory expectations for new NPLs was well received by stakeholders, including the industry. The Addendum, together with our NPL Guidance, allows banks to tackle their NPLs within a clear supervisory framework and make steady progress especially when economic conditions are favourable. It complements the Commission’s legislative proposal on the introduction of statutory prudential backstops to tackle potential under-provisioning for new loans that turn non-performing. The ECB and the Commission have closely collaborated on these two initiatives.
On the question of how to address the stock of NPLs, we are still developing our policy but I expect to be able to discuss it with you in more detail later this year.
I now welcome your questions on these and other topics.