Introductory statement by Andrea Enria, Chair of the Supervisory Board of the ECB, at the press conference on the results of the 2019 SREP cycle
Frankfurt, 28 January 2020Jump to the transcript of the questions and answers
Ladies and gentlemen,
Welcome to our press conference on the Supervisory Review and Evaluation Process, the SREP for short, which is our main supervisory tool.
The SREP allows us to spot weaknesses in banks and take measures to address them, through capital add-ons such as the Pillar 2 requirements and guidance as well as through qualitative measures.
The SREP is not a new tool, though; we’ve been using it ever since European banking supervision was established. Yet so far, we have only published broad aggregate outcomes. But today, as part of our ongoing drive to achieve greater transparency, we are publishing more granular results, more details of the SREP methodology and a list of individual banks’ Pillar 2 requirements, or P2R. The outcome of the 2019 SREP cycle – whether in the form of capital add-ons or qualitative measures – applies to the banks in 2020.
For the first time ever, we are publishing individual Pillar 2 requirements. We are very pleased that 108 of the 109 banks we examined in this SREP cycle have consented to have their P2R published on our website, one year earlier than required by the revised Capital Requirements Regulation. The publication of individual SREP outcomes will shed more light on the state of European banks, which should help banks to compare their own position with that of their peers and allow investors to take more informed decisions.
Let’s now look at the actual results.
Starting with the big picture: the Common Equity Tier 1 capital, or CET1, requirements and guidance remain stable at 10.6%. This confirms a stabilisation in the supervisory assessment of banks’ capital needs.
Individual outcomes vary, though, reflecting changes in the underlying risk profile: overall capital requirements and guidance changed for one in every three banks, going up in about 15% of cases and down in another 15%. On average, P2R is higher as the score worsens: on a scale of 1 to 4, the higher the score, the riskier the bank, and the higher the capital add-on.
Looking at business models, global systemically important banks (G-SIBs) face lower Pillar 2 guidance (P2G), reflecting higher resilience in stress test exercises. In terms of overall CET1 requirements, including the systemic buffers, G-SIBs are at a comparable level to that of banks with other business models.
The upcoming revision of European banking regulation will allow banks to fulfil Pillar 2 requirements partly with capital of lower quality than CET1. According to our calculations, CET1 requirements will thus fall by around 90 basis points.
Almost all banks have adequate levels of capital, in excess of all requirements, including the systemic and countercyclical buffers. At the end of the third quarter of 2019, six banks had capital levels below the Pillar 2 guidance set for 2020. In four cases, that shortfall had already been remedied by the end of 2019. The two remaining banks have been requested to take remedial actions within a well-defined timeline.
Capital requirements and guidance are not the only outcome of the SREP. As I already mentioned, there are also qualitative measures, or, in other words, actions banks are asked to take in order to fix issues that we have identified in the SREP.
Altogether, 91 banks with qualitative measures were triggered in the 2019 SREP, only slightly more than in 2018.
The distribution of the qualitative measures shows that supervisory concerns are particularly focused on the area of internal governance: almost a third of all remedial actions to be taken by banks relate to their governance. Indeed, the SREP scores for internal governance worsened across all business models, continuing a trend seen in previous years. Three out of four banks (76%, up from 67% in 2018) scored 3. Only 18% of banks achieved a score of 2, down from 25% in 2018.
Digging a bit deeper, qualitative measures aim to address severe weaknesses in the internal control functions of banks, lack of effectiveness in their management bodies and deficiencies in their risk management. Moreover, remuneration schemes are often designed in a way that places too much weight on short-term profitability, and not enough weight on long-term sustainability. Finally, controls and procedures regarding anti-money laundering are still insufficient.
In short: we are concerned about governance. Faulty governance can be the source of many other issues. Take operational risk as an example. The outcome of the SREP in this area is worse than last year when we consider the increase in the number of banks scoring 3. And most operational losses stem from conduct risk, which can often be traced back to governance issues.
The deterioration in scores for operational risk also reflects the fact that IT and cyber risks have increased for a number of banks. Thus, in 2020, we will maintain a heightened focus on such risks by carrying out on-site inspections dedicated to IT. In addition, the harmonised cyber incident reporting framework will help us to enhance our knowledge about cyber security breaches – clearly an area that banks need to work on.
Another prominent area of supervisory concern is the low level of profitability of European banks. Many of them do not earn their cost of capital, and valuations remain low. From a supervisory perspective, this means low organic generation of capital, and challenging conditions if banks need to raise equity in the market.
Banks tend to blame the lack of profitability on external conditions, pointing to negative interest rate policies, stringent regulatory requirements, tougher competition including from companies that employ new technologies, and sluggish growth in the euro area. While it is undeniable that the external environment is challenging, this is not going to change in the short term. Banks need to sharpen their managerial efforts to refocus their business models, deploy effective strategies on digitalisation and achieve more radical improvements in cost efficiency. Consolidation could also prove helpful in achieving these goals.
This is why one of our priorities this year is to assess banks’ future resilience and the sustainability of their business models. And we may well consider stepping up supervisory pressure if banks’ self-help measures are not effective enough.
Progress continues to be made in the post-crisis cleaning of banks’ balance sheets. When the ECB took over banking supervision in 2014, non-performing loans (NPLs) in the euro area stood at €1 trillion, 8% of total loans. Since then, we have taken various measures, and the banks have put a lot of work into bringing down NPLs. And these efforts have been successful: since 2014, the volume of NPLs has shrunk by almost half, to €543 billion, and the NPL ratio has fallen to 3.4%.
Looking ahead, the volume of NPLs is expected to decrease further, in line with the targets banks have agreed with their supervisors. When we look at the strategies of “high-NPL banks”, we see that they plan to bring down their NPLs by almost another 35% over the next two years. What’s more, this planned reduction targets in particular very old NPLs, which tend to be the most difficult to cure or dispose of.
So banks are on the right track when it comes to asset quality. But the SREP decisions recommend that banks with high NPLs maintain a strong focus on achieving their targets and continue improving their risk profile.
Regarding risks to liquidity, overall scores showed that banks have a good liquidity position: 76% of the banks have a score of 2 (70% in 2018) and 4 banks scored 1 (down from 12 in 2018). Many significant institutions have missed their own funding plan targets, in part due to their changed expectations on monetary conditions.
And now I am looking forward to answering your questions.
* * *
I have two questions. You are talking about the low profitability of the banks. Well, the interest rates are at 0%, and in a negative area, so to what extent is the ECB also part of the problem? You introduced a tiered system. Has this system helped to improve the profitability of the banks? Could you quantify by how much?
My second question is can we take conclusions about countries if we see that the banks in a country have a higher Pillar 2 requirement? Can we take conclusions about the risks of the banks concerning growth in the country, or something like that?
First of all, the negative interest rate policy has an impact on bank margins, but there are also positive effects on banks' balance sheets. Of course, with low interest rates it's more likely that borrowers pay back their loans, and it is easier for banks to manage and dispose of their non-performing loans. So probably the major progress which has been achieved in the area of asset quality would not have been achieved without the monetary policy deployed by the ECB. Also, notwithstanding the compression on margins, there is a positive effect on volumes that needs to be taken into consideration. So the net effect is not easy to quantify. There has been an analysis done by colleagues inside the European Central Bank which argues that the pros and cons are balanced, but in any case it is undeniable that there is a pressure on bank margins. That's why I focus very much on the need for banks’ management to give close attention to their business models, to cost efficiency, to investment in technologies. We have seen that banks which have been more effective in investing in new technologies, bringing down the cost-to-income ratio, are also the banks which have achieved the highest level of profit. So banks need to deploy some self-help measures here.
The conclusion for countries: again, we look at banks; we don't look at countries. I mean, the flag that is on the headquarters of the banks is not a very relevant issue for us. Of course, there could be specificities in the macroeconomic outlook in some countries that can affect also the banks in those countries, but that's not specifically our focus.
You said you will consider stepping up supervisory pressure. What would that be concretely? What would be the pressure you will hold on the banks?
As I said, already in the SREP process we have a number of measures. It's clear that we have been already pushing banks to tackle issues related to their cost efficiencies, for instance. If you look at the scores, for instance, in the business model, they're probably still relatively high, so we might reconsider whether these scores are still appropriate, given the inability of the banks to tackle issues that we have brought to their attention. So these could gradually come more into the focus of our supervisory recommendations and our supervisory scores and assessments.
I have two questions. The first is on the P2R disclosures – super-helpful – thank you, also, from us in the press. Now, interestingly enough, the – I don't want to call them the Brexit banks – but for example, banks like Barclays, Ulster Bank – there are a couple of names there – who have interesting company, in that they're together with Greek banks, Italian banks, and some Italian banks with more problems. So does that reflect a fundamental risk you see in Brexit banks, or is it a question of you wanting to make sure capital is here because these days the world is splintering apart and you want to make sure there's capital on hand locally? What does this mean, then, for them, and for the other Brexit banks coming along as well?
Then the other thing is – I mean this was an incredible sentence you guys had today from the press release: “Furthermore, some banks reported material losses which were mostly due to conduct risk events.” This is 2020 and we still have this. I'm just wondering, in the conduct here, are we talking the legacy of litigation that many banks told us was behind them? Are we talking about rogue traders, which again, many banks told us were behind them? What exactly is that there, and how worrying is it that we're still dealing with these issues after the financial crisis?
No, I wouldn't say that we have a specific [Brexit] focus here. I mean, for sure, I would rule out most energetically that we are using the Pillar 2 requirements as a tool to ask banks that are relocating post-Brexit to have more capital here, because we want to ring-fence. That's definitely not the point. The Pillar 2 requirements are set with respect to the specific risk profiles of the bank, so there is not a homogeneous Brexit bank category which deserves higher capital requirements; not at all. It's idiosyncratic, individual banks, and there is no specific narrative to be found there.
On your point on conduct, yes, you are spot-on there. I must say that if you had asked me three years ago a question like that I would have probably said, yes, there is a pipeline of old misselling, old practices, which have been taken care of through the reform process, the tightening of the supervisory framework. Actually, I see that this pipeline is not drying up. It's still very dense. We still see a number of cases. Many of the cases which have been very relevant also in 2019 have relation to money-laundering concerns, for instance, huge fines raised, for instance, by US authorities. So this is an area in which we are putting quite a lot of our attention. Also, we are not, as you know, an anti-money laundering supervisor, but from the impact that this could have on the banks in terms of stability and also for what it signals in terms of weaknesses in internal controls and governance, of course, these are areas we are paying a lot of attention to.
I wanted to ask two questions. Firstly, on leveraged loans, I wondered how they're factored into the SREP process, and if any concerns have led directly to capital increases.
Secondly, on the two banks that are still not meeting the Pillar 2 guidance, do they face any consequences in the meantime?
On your first question, the short answer is, yes. Not in terms, necessarily, of the capital impact, but I think there is that in a number of cases. If I remember well, actually, in 25 cases there have been specific measures which have been taken with reference to leveraged loans. We have done specific analysis, specific deep-dives in this area, and when we have found weaknesses we have asked banks to take remedial measures. So this is a part of the exercise.
On the banks, yes, as I mentioned, in the cases of the two banks which actually are below the Pillar 2 guidance at the start of the year, there have been specific capital plans which have been asked of the banks with a specific timeline for them to meet.
Could I ask you to be a bit more specific on the remedial actions that the ECB is requiring banks to take?
Secondly, could you talk a bit more about what the ECB can do, what the supervisor can do, to encourage more consolidation in the sector?
The qualitative measures in general have a wide array of requirements. I focused a bit in my presentation on those which focus on governance, because these were the most numerous in the 2019 cycle. I mentioned, for instance, internal controls, data aggregation issues, weaknesses in the board. I mean, these are areas in which we ask, bank by bank, for very specific remedial measures. If you are referring to the measures on the two banks, these are capital plans. So if there is a shortfall in terms of the capital position with respect to the Pillar 2 guidance – and Pillar 2 guidance, let me be clear here, is not a hardwired minimum. So banks are allowed to go below that bar if there is a specific circumstance warranting it. I mean, it's a stressed requirement, so if the stress materialises for the bank, the bank can delve into the guidance, but in general, we expect the banks to set up a capital plan to re-establish, to replenish their levels.
The other question was on consolidation. Yes, again, it is not up to us to push consolidation. We think there is a good economic rationale for consolidation in terms of there being excess capacity out there. The only point which I could say that might be helpful is that sometimes I hear the perception in markets that ECB Banking Supervision is negative on consolidation. So that whenever we see a deal we tend to set the bar for capital relatively high, and this discourages banks to even consider the prospects of consolidation, and I have been trying to dispel this concern. We plan to clarify our policies on how we use our powers in this area, and we'll come out later this year with some clarification, for instance, on how we treat badwill, how we look at the capital and equity of two banks which are merging, and the like.
My question is about Isabel dos Santos and what's happening right now in Portugal. She's getting out of EuroBic, so that's one thing sorted, but she still has commercial relations with some SSM-supervised banks in Portugal. So what's your plan to do about those? Are you going to tell the banks to cut her off?
The second question is broader, still about that. So what are the lessons that you can draw? This woman was allowed to be a shareholder of a bank for many years, and so how happy are you about your performance there, and what are you going to change, and how clear are you about the Banco de Portugal's performance? So how do you plan not to repeat that mistake, basically?
Well, as you will surely understand, I cannot comment on a specific case, but let me say a few points which I think are relevant in this area. First of all, fit and proper assessments are not static, one-off assessments. Whenever you have new information that comes up, you should be in a position to reassess the status of certain shareholders or managers and reconsider. That's something that we are doing more and more. For instance, we have started doing board reviews. If you have a specific issue in a bank which is, for instance, subject to money laundering or something like that, we can review: which members of the board were responsible for these functions? Did they perform well? Did they do a good job? If not, we can take action there.
The second point I want to make: how happy I am? I am not very happy, to be honest. I am not very happy – not about the performance, ours or Banco de Portugal's – I'm not very happy about the relative – and there is no better term that comes to me – mess, the mess in the legislative setup here. I mean, it's very difficult for us to do a fit-and-proper assessment in a proper way. This is an area which is one of the least harmonised throughout the Union, which means that we have to apply a set of very different local provisions, local implementation of European rules in each member state in the banking union. This means that we can very well come out with assessments in some cases which are not positive, but we cannot act because the local legislation does not give us the tool to intervene. And I'm not pleased with that at all, to be honest. Another point which is important to me is that in some countries you have the possibility to do ex ante assessments; in other countries you can only do ex post assessments. Also, that is something that we don't like. Basically we would like to have, first of all, a common way of doing the assessments across the board, and to have these done ex ante so that we can provide a filter on who goes in the ownership structure of banks, in the board of banks. So I'm not very happy.
You said you were surprised when you arrived at the SSM about the internal controls and risks for banks, and they're not adequate enough. Can you give us an idea what kind of risks the banks stumble on? Which are the risks in this particular case for internal controls that are harder for banks to assess?
Then, if you cannot comment on specific banks, but maybe you can comment on a country question on non-performing loans. As you are satisfied on an aggregate level, but would you say that also about Italian banks, are you satisfied with what they've done up to now?
Well, the point I was referring to was specifically on the data side, on the data quality. Whenever you're seeing results of on-site inspections, for instance, in many cases you have a number of very high-relevance findings which are in the area of data quality. This reflects a number of issues. Just the sloppiness, pure internal organisation of data, but also in many cases very old legacy IT systems, end-of-life IT systems, which is a problem at a number of banks across our jurisdiction. When you don't have enough good data, of course, it's also difficult for the control functions to see what's going on in the banks, where our potential risks are and to take preventive actions soon enough. So these two points are very strongly related. We mentioned the point of data aggregation capabilities at banks. I think I sent a letter to the banks mid-last year. This is a specific requirement of the Basel Committee, which we find is very poorly implemented by European banks. This means that you are not even able to aggregate the positions across all the establishments – meaning the subsidiaries, the branches – in your group and give a very fast and clear understanding of how much risk you have in a certain area. That's something which is not acceptable from a supervisory perspective.
On NPLs, as I said, there is good progress, and this, I must say, concerns banks across the board. I wouldn't give a specific connotation. I think Italian banks have done very significant [work]. That explains a lot of the decrease in 2019, also because the amount, of the stock was quite high, and still is. But also banks in other countries were very much in line, and sometimes over-achieved the targets. So that's something very positive.
You mentioned that a lot of banks, or the majority of banks, don't earn their cost of capital. Isn't this the basis for further trouble in the future, and what can the ECB do in this area to improve these things?
The fact that most banks don't manage to earn their cost of capital means also there are a number of banks that do. So there are banks which have been able to actually earn their cost of capital, to have a return on equity in double-digits, which have managed to bring the cost-to-income ratios, for instance, very low. We have the cost-to-income of European banks which is stuck around 66% for a long while. It's clear that if you are in this environment – that's why I mentioned self-help measures – this external environment, in terms of interest rates, in terms of macroeconomic outlook, in terms of competition, it's not going to get better in the short term. So banks need really to focus on the levers that they have in their hands. We made a survey, a couple of years ago I think, on the profitability of banks, which showed that the banks that were better in achieving higher profitability were the banks that had a better strategic steer. So again, it's boards, managers, that need to understand what drives their profits, refocus their business models in the areas where they can make money, trim down other areas, reduce costs, and achieve greater cost-efficiency. We have seen also that investment in IT, so the ability to use IT in an effective way, both in terms of back-office and in terms of distribution strategies is also another important lever to consider.
You mentioned consolidation before. Do you have any signs that there is some consolidation to happen, because in the last couple of years we haven't seen much of that? What do you think are the main reasons that not much has happened in terms of consolidation in the last years?
Well, that's a good question. I mean, there are signals that bank managers are considering more, possibly, consolidation strategies. So far, they have not really taken this up. There are two types of consolidation strategies we can consider. One is sort of in-market consolidation, so when you target cost reductions and efficiency increases. So that's where you basically try to have consolidation between banks which have overlapping distribution networks, for instance. These generally would be domestic type of mergers. We've seen some of them; not many, but we have seen some of them; maybe not high-profile, not catching the headlines, but we are seeing some of them, and sometimes we also see some discussions that can bring further developments in this area.
Or you can have more cross-border types of consolidation, so consolidations that target revenue diversification, which is also very positive from [our perspective] us as supervisors. Because, of course, it gives you more ability to diversify risks, which means that if you have an idiosyncratic shock in one country, you would be able to withstand it better because your profits are generated in different markets. This type of consolidation, so far, has been hampered, to a large extent, also by legislative constraints, or policy constraints. So there have been a number of legislative measures, for instance, that have not allowed banks to perform asset and liability management on a cross-border basis, even within the euro area: even where you have a single supervisor, single resolution authority, single resolution fund, but still you have differences in which asset and liability management is performed within countries and cross-border. So that's the main issue that I think should be addressed going forward, and there have been a number of other impediments. For instance, some national discretions and large exposures that prevent the banks from centralised funding, and then have it operated in an integrated fashion for the group as a whole, or within the euro area. So this reduces the benefits of diversifying your business cross-border, and makes the case for cross-border consolidation more complicated. But I cannot rule out that there are also some business areas in which – maybe not for high-profile business combinations – you can still see interesting opportunities. There are some lines of business in which scale is very important, the cost of business, investment banking, so in those areas maybe banks could consider also aggregation projects. So we'll have to wait and see. The only point, as I said before, that I'm keen to make, is that there is no supervisory impediment, at least. No impediment that we want to throw into the way of consolidation from the supervisory side. Of course, we will always ask that banks that want to engage in a consolidation process have a good business plan, and have a capital trajectory that is ensuring us that they will always be respecting the requirements.
Europos Centrinis Bankas
Komunikacijos generalinis direktoratas
- Sonnemannstrasse 20
- 60314 Frankfurtas prie Maino, Vokietija
- +49 69 1344 7455
Leidžiama perspausdinti, jei nurodomas šaltinis.Kontaktai žiniasklaidai