First ordinary hearing in 2019 at the European Parliament’s Economic and Monetary Affairs Committee

Introductory statement by Andrea Enria, Chair of the Supervisory Board of the ECB, Brussels, 4 September 2019

It is a great pleasure for me to be here for this first hearing before the newly elected European Parliament.

ECB Banking Supervision and the European Parliament

The effectiveness of our supervisory work and the consistency of supervisory outcomes largely depend on the strength and level of harmonisation of the regulatory framework. In turn, feedback from the supervisor on its everyday application of the rules is essential in ensuring that the objectives set out in legislation are met in a continuously changing market environment. So the banking union’s success depends on our productive cooperation.

ECB Banking Supervision is committed to fulfilling its accountability duties towards this Parliament. Both independence and accountability are fundamental to ensuring high-quality banking supervision for the benefit of all European citizens.

And we are of course committed to good cooperation with other EU institutions. For example, we recently agreed with the European Court of Auditors on a Memorandum of Understanding regarding practical information-sharing arrangements between our two institutions, which will be signed in October. Parliament had requested this MoU which will ensure that the ECA can perform its audit mandate for ECB Banking Supervision. It signals goodwill between both parties and the shared intention to cooperate constructively.

Our work and priorities for the near future

Next year, as every year, we will organise our work around a set of key supervisory priorities. The completion of the post-crisis repair process will continue to rank high in our priorities, while we will also focus on emerging risks and on the drivers of low profitability and low market valuations for European banks.

In particular, we will follow up on our guidance on non-performing loans, as well as on the recommendations stemming from our targeted review of internal models. And we will conduct on-site missions focusing on trading risk and asset valuations.

We will continue to evaluate the banks’ credit underwriting criteria and the quality of their internal capital and liquidity adequacy assessment processes.

Moreover, we will monitor the sustainability of banks’ business models, specifically with a view to profitability and the ongoing digitalisation of financial services. On a related note, we will closely monitor banks’ vulnerability to IT and cyber risk.

Other key issues for our supervisors will be Brexit and the EU-wide stress test. And comprehensive assessments will continue to increase in number and relevance as banks relocate business to the euro area as a consequence of Brexit and as Member States – Bulgaria, followed by Croatia – apply for close cooperation.

Non-performing exposures and Brexit preparedness

Allow me to focus now on some of the crucial topics we have been working on over the past few months.

As some of you may recall, ECB Banking Supervision had committed to reconsidering its supervisory expectations on new non-performing exposures, or NPEs, following the finalisation of new legislation.

We have now carefully assessed the interaction between our approach and the new Pillar 1 backstop for NPEs laid down in the latest Capital Requirements Regulation, and we have concluded that some adjustments to our supervisory expectations for prudential provisioning for new NPEs are warranted. These adjustments will enhance the consistency and simplicity of the overall approach to NPEs, reducing the reporting burden for banks.

The scope of the ECB’s supervisory expectations for new NPEs will be limited to NPEs arising from loans originated before 26 April 2019, which are not subject to the Pillar 1 NPE backstop. NPEs arising from loans originated from 26 April 2019 onwards will be subject to the Pillar 1 backstop, with the ECB paying close attention to the risks arising from them.

Supervisory expectations for the stock of non-performing exposures (i.e. exposures classified as NPEs on 31 March 2018) remain unchanged, as communicated in the SREP letters sent to banks and in a press release published by the ECB in July 2018.

Since my last hearing before this committee, we have also been continuing to monitor banks’ preparedness for Brexit, as the likelihood of a no-deal scenario remains a concern for us. Action has been taken at EU and national levels where necessary, and options are available to enable the private sector to be duly prepared in the event of no deal. The ECB and national supervisors have been in direct discussions with banks and have stressed from the outset that banks should plan for all possible contingencies. Banks should now speed up the implementation of their Brexit plans so as to be fully prepared in the event of a hard Brexit at the end of October.

Regulatory and supervisory challenges in the new legislative term

Let me now turn to regulatory challenges in banking for the new legislative term.

At this juncture, it is important to remember the lessons from the last crisis. We therefore support the full, timely and consistent implementation of Basel III. The reform cycle needs to come to a close, but we must finish the important job we have started. It is imperative to complete the work on risk-weighted assets and internal models.

The objective is to ensure that those banks which, in the past, made inappropriate use of internal models to drive down their regulatory capital make the necessary adjustments. The international standards substantially reflect the analyses conducted by the European Banking Authority (EBA) on the consistency of risk-weighted assets and the findings of the ECB’s review of internal models. The expected impact on capital requirements is concentrated in large banks, which in most cases have already been requested to adjust their models.

We also need to acknowledge that the implementation of the Basel II floor was more lenient in the EU, making the new output floor more costly here than in other jurisdictions. Although the output floor might have an unwarranted impact on low-risk business, it also ensures a more level playing field between banks using internal models and banks relying on standardised approaches.

It is essential to complete this last chapter of the post-crisis reform agenda and to give banks and markets certainty that regulatory requirements have achieved a stable configuration.

Beyond the implementation of Basel III, the next review of the Capital Requirements Regulation and Directive should be an opportunity to address existing shortcomings. In particular, we need to enhance the harmonisation of the framework to assess the fitness and propriety of banks’ board members. The existing differences in national legislation seriously impair the conduct of supervisory tasks in the banking union.

In addition, competent authorities should be able to require institutions to meet their supervisory Pillar 2 requirements with capital instruments of the highest quality, known as Common Equity Tier 1. The prudential and supervisory approach to information and communications technology risk management may also need further attention.

Regarding further reforms, it is important to continue strengthening the institutional architecture of the banking union, the third pillar of which, a European deposit insurance scheme, is still missing.

Structural impediments to bank integration and consolidation driven by the incompleteness of the banking union, along with other legislative obstacles to cross-border banking in the euro area, are weighing on the health of our banks, which suffer from low market valuations.

Finally, let me stress that we are integrating money-laundering risks into our prudential work. The ECB works closely with the EBA and national prudential and anti-money laundering or counter financing of terrorism (AML/CFT) supervisors on implementing the tasks set out in the Council’s AML Action Plan. In this context, the SSM AML/CFT Coordination Function leads the internal policy work on updating the SSM methodology to consistently take account of AML/CFT concerns in the relevant supervisory activities. Still, I see a need to further strengthen and harmonise the overall AML framework in the EU.

Concluding remarks

A number of other issues that I and my predecessor discussed frequently with this Committee over the past legislative term remain very important for our work. Among them are leveraged lending, stress testing and internal models. We have provided supervisory guidance on leveraged lending but still need to remain vigilant about market developments. We conducted a targeted stress test to review liquidity risk and we are already preparing for next year’s EU-wide stress test exercise. And our work on internal models has proven effective in addressing inconsistencies and unwarranted variability in banks’ use of internal models. I would be happy to discuss these issues in more detail should you have any questions about them.

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