Transcript of the media briefing on June 9, 2020 (with Q&A)

Andrea Enria, Chair of the Supervisory Board of the ECB,
Frankfurt am Main, 9 June 2020

Jump to the transcript of the questions and answers

Andrea Enria, Chair of the Supervisory Board of the ECB

Welcome to everybody and thanks for attending this press briefing call. It’s been a while since the last time – I think it was January, if I’m not mistaken – and, well, quite a lot has happened. So I thought it was a good idea to touch base. I hope you have no excessively high expectations as to how much I can dispel the uncertainty in which we are living right now, but at least I can give you some background on what we are doing and what we are thinking about the European banks right now.

I will start of course by noting that the European banking sector entered this COVID-19 crisis in a much stronger position than in the past and in the previous crisis in particular. The capital position was much stronger – is much stronger: 14.8% common equity tier one (CET1) ratio to start with – compared, for instance, with below 9% CET1 ratio in 2008. So, much lower in level and much lower, of course, also in quality of capital. Also, liquidity buffers are much stronger. We have €3.2 trillion of high quality liquidity assets/liquidity buffers available for the banks, and a liquidity coverage ratio of 145% – 100% is the minimum level, as you know.

So, significant buffers, and there has been very swift action by the ECB: a swift policy response on the supervisory side to increase the headroom and the possibility for banks to use these capital buffers and liquidity buffers to support their customers, and also for the capital buffers to absorb losses.

I will not go into great detail on the policy measures: you probably know them. But in general we created – through dividend payment restrictions, availability for use of Pillar 2 buffers and other measures, such as frontloading legislative decisions on the quality of capital, – a space of approximately €160 billion, thus additional capital that can be used by the banks in this crisis. First of all let me note that we always focus on the parts of the banking union that are not yet there, on the incomplete nature of the banking union. I myself am always quite vocal in asking for a completion of the banking union.

From time to time, we should also stop and consider; how much is there in the banking union which is actually working? Such a fast and unified supervisory response at the European level would not have been thinkable in 2008/2009. All in all, let's say – let me give the overall envelope, the figures which I think are relevant: banks now have €400 billion of capital available as a buffer that can be freely used on top of the capital conservation buffer, which is where the constraints to [dividend] distribution, as well as payments of Additional Tier 1 coupons and variable remunerations, are key. €400 billion, to give you an order of magnitude, is an amount which is comparable and would have been sufficient to withstand an increase in non-performing loans similar to the one observed in the sovereign debt crisis. So it's a quite significant amount of money.

If you add the capital conservation buffer, which is the additional buffer on top of minimum requirements, we reach a total buffer of €610 billion of capital resources that can be used. So it's quite a significant amount, and, differently from 2009, when banks were at the origin of the shock and their malfunctioning was actually transmitting into the real economy, so far the banks have been acting more as a shock absorber. So they were not at the origin of the crisis, but they were actually helping out, absorbing the shock. They have been able to accommodate the significant increase in lending in March; approximately €120 billion, which is one of the highest increases on record. This was driven mainly by drawing on committed credit lines, but also some re-intermediation of activities developed outside the regulated banking sector; for instance by money market funds and the like. They've also withstood a significant spike in market risk due to the increased volatility in markets.

If you look at the evidence provided by the ECB in the bank lending survey, the banks have been able to do so without a significant tightening of lending standards – very differently from what happened in 2008, when there was a significant restriction in lending standards. Banks also expect that in the second quarter of this year – so now, basically – there will be a further relief in lending standards which will accommodate an increase in the demand for credit. Of course now the government guarantees and the moratoriums are having an impact on the banks' balance sheets. We will have information later on, around the summer; let's say around July. All in all, if you take a snapshot right now, the banks have behaved as expected and in line with the increased resilience created by supervisory pressure and regulatory reforms after the last crisis.

Now, let me say me a little more about the area of uncertainty in which we are right now. The first point that I would highlight is that there is still some apparent reluctance from the bank side to actually use the capital and liquidity buffers. The liquidity buffers have actually increased so far. There seems to be a little bit of uneasiness in actually using also the Pillar 2 buffers. If you browse through the first-quarter results that have been published by the banks, only less than a handful are projecting a very limited use of the Pillar 2 buffers at the end of the year. We have asked banks why this is the case. They argue that they are concerned about the reaction of markets, of rating agencies, of investors. We will also discuss this with the rating agencies; there seems to be a slight mentality that nobody wants to be the first dipping into the buffers. This could be a bit of an issue in terms of making these amounts of capital fully available to absorb losses and especially to support the economy.

The triggers to suspend payments on Additional Tier 1 instruments are very much a concern. So that's a point on which we must reflect; whether the current regulatory framework is working as expected. Also there is a point which the banks are raising to us quite a lot, which is: you – the ECB – are now making these buffers available. But if you switch them on again in the future, we could be in trouble. So they are reluctant to use them. We always send signals that we will not switch the buffers back on again very quickly. We will give ample time to the banks to rebuild the buffers, and we hope to be able to give more communication about that in the near future. In general I'd say we would prefer to give a sort of bank-by-bank guidance, allowing them to rebuild buffers in a comfortable way.

This issue of the buffers and the impact on lending is a question that we are struggling with. A second issue of course is profitability, which was already low to start with – and it has become even lower. The return on equity was 5.9% at the end of 2019, and according to analysts' expectations, it will more than halve to 2.4% towards the end of the year. The valuations, the price-to-book ratios, are very depressed. Some argue that this is our fault because of the constraints to dividend distributions. But I would argue that there was a weakness in terms of valuations which had been there for a while. Although we acknowledge that the dividend constraints might have an impact on investors' perception, we think that they are warranted in the current market conditions.

On the cost of risk issue, browse the results of the first quarter. You will see that the figures in terms of cost of risk and provisioning behaviour reflect the great uncertainty that was already there at the start of this crisis. Banks use very different scenarios and very different expectations to project their loss expectations and to determine their provisioning needs, and there is a wide variety across banks. Now, the ECB published a few days ago the macroeconomic projections, which now already incorporate the COVID-19 shock. We would expect this scenario to provide an anchor for banks' expectations in the second quarter. This should lead to more consistent, and ideally also slightly more prudent, provisioning choices in the second quarter of the year.

In general, if you look at the cost of risk, for instance, we noticed that 40% of the banks registered an increase in cost of risk in the first quarter of 2020 compared to the first quarter of 2019 below two basis points, so very minimal. Only 9% projected an increase higher than 20 basis points, so we expect to see more in the next quarter.

Let me move towards the conclusion. This is the situation we are in now, uncertainty, but we expect banks to start improving their projections of their expected losses in the future and the impact on the asset quality – particularly from this crisis. We are currently running a vulnerability assessment, so we are ourselves trying to estimate how the banks would fare under the scenario provided by the ECB in the macroeconomic projections. But also under an adverse scenario, and a pretty severe one which has also been communicated by the ECB last week. We will try to use these scenarios, of course, to challenge the conservatism of the banks in their provisioning choices. We will also look at the adverse scenario to check whether the banks would also be able to withstand a situation in which you have a second wave of contagion after the summer, and a much slower path of recovery after this shock.

This is more or less where we are right now in terms of looking at the banks. Maybe an additional point on which I would make a final remark is that we have a flurry of national measures which have been put in place by national authorities, governments in terms of moratoriums, and government guarantees. We very much welcome these measures. We think that, together with our supervisory relief and with the extraordinary support provided by our colleagues on the central banking side of the ECB, this is a very effective package to address the issues raised by the crisis. At the same time, we noticed that these national measures are very diverse. They range from 2% of GDP in terms of coverage to 40% of GDP across countries in our jurisdiction in the banking union.

I would stress that the support for banks is actually European in nature; it is what is coming from the ECB central banking side in terms of funding and collateral policy. The support in the form of supervisory relief measures is also European in nature. It's our relief package, but the differences between the national support packages will imply that the asset quality programme will materialise in a different way across Member States, potentially reinforcing the segmentation of the markets in the banking union. So I am very supportive, of course, of the recent recovery plan put forward by the European Commission, and the idea that there could be European measures that can make the response to the crisis more integrated and avoid further segmentation in our banking markets. I would leave it there and I am now ready for questions and the discussion.

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My first question has to do with the ESRB's recommendation from yesterday that banks don't pay dividends for the rest of the year. You have already said until the start of October, so are you going to take on board that recommendation from the ESRB?

And the second question is: can you unpack a little what you said at the end of your presentation about a pan-European response? What do you have in mind?

On the recommendation by the European Systemic Risk Board (ESRB), I would stress first and foremost that the ESRB says that the recommendation is supportive of the decisions taken by ECB Banking Supervision, which has already issued a recommendation to suspend payments of dividends for the time being. It’s extending, basically, this recommendation to other sectors, creating a level playing field across financial institutions in the European Union. Of course, as you correctly noted, there is this discrepancy in terms of the timeline. We were planning in any case to provide feedback to the banks relatively soon. We are under pressure from the banking industry to provide some indications ahead of the publication of the second-quarter results. We will reconsider the situation also in light of the ESRB recommendation and discuss it at the Supervisory Board and provide an indication to the banks soon; I hope already in July. I am, of course, not in a position at the moment to give you further indication before having consulted my Board.

Regarding the pan-European response, again I would like to stress that there has already been a sea change with respect to the past strong and fast reaction on the funding side, from the central bank, from the monetary policy colleagues; a strong and totally unified fast supervisory reaction. So we do already have a pan-European response in place and this, in my view, is already making a big difference. Of course, when you are talking about fiscal measures, you cannot yet go into an integrated response, but the news this time is that, also on that side, you have important measures that will be taken at the European level. For the moment, in terms of the need for additional responses, on the banking side, I think it would be premature to say anything. At the moment we need to assess whether the significant buffers that I mentioned at the beginning of my remarks will also be sufficient to withstand a major deterioration in the crisis, with a further wave of contagion and lockdown measures – but we are not there yet. We hope to have some conclusions and some answers to these questions around July. From then on, we will address whether further tools will be needed.

Two questions, if I may. One is about the bank moratoria that, as you mentioned, have been declared in a number of countries. They all tend to expire, if I'm not mistaken, in the autumn. As a regulator, do you think those moratoria can be extended once they expire, without having a regulatory impact? Or else is there only so far in terms of length they can go and should they at some point be withdrawn?

Second question: at some point there has been some public discussion in the press about the option of having a bad bank type of response to the non-performing loans (NPL) problem that is sure to emerge. That kind of discussion disappeared; do you think it's just premature to talk about it or to think about it, or is it just not the kind of instrument that you would recommend in this crisis?

Yes, according to our assessment, we are still collecting information about all the national measures which have been adopted. I think you're right; most of the moratoria measures are expiring at the end of September, October or December. So it's in this period, basically. I think that the answer to your question is very difficult because it depends on the situation we are in in the autumn. It's clear that if we are in a second wave of contagion and lockdown measures, probably there will be a lot of pressure to further extend the moratoria. I don't think that we as regulators would be in a position to object to that. Actually we understand that in such a situation, such measures and an extension of the measures might be warranted.

It is clear, though, that the longer the moratoria last, the more likely it is that when they are lifted, there would be a cliff effect in terms of materialisation of asset quality problems on the banks' balance sheets. So it's clear that if we go into this scenario in which there are further contagion lockdown measures and further extensions of moratoria, then I think that we should carefully consider whether the amount of impairment in asset quality would require additional measures, or whether the ordinary measures that we set in place after the last crisis would be sufficient to deal with the new wave of non-performing loans. As you know, we have taken a lot of measures as the ECB, which have then also been crystallised in a number of guidelines of the EBA and even legislation. These should allow a much faster path for addressing the NPL levels.

If, of course, the increase in NPLs were to be on an even higher scale than what we experienced after the sovereign debt crisis, I think that indeed there could be some room to also consider additional measures. As I mentioned, in the past I have been very supportive of asset management companies. I think they are useful tools to deal with very significant levels of non-performing loans because they make it possible to shift these assets off the banks' balance sheets in a very fast way. They restore the ability of the banking sector to fulfil its core functions. Again, let me reiterate the point; we are not yet in a position to say whether this will be needed. It's very premature to start talking about that right now. That's why I think it has disappeared from the public debate, at the moment.

I wanted to ask: do you think that there is a chance that banks could end up with more non-performing loans than after the last crisis, later on in this year, regardless of whether we get a second wave of lockdown measures?

If banks needed to raise additional capital, would they be in a position to do so?

If there is no second wave and if the recovery picks up speed now in the coming months, according to the projections of the ECB, I think that the buffers which are available in the banks' balance sheets – on aggregate of course – are quite sizeable. You asked me to answer a question which would require me to have completed the vulnerability analysis that we are just conducting right now. So I don't have a precise answer to your question, to be honest. But my gut feeling is that the size of the buffers, as I see it right now, would be sufficient to withstand an increase in NPLs similar to the one that we experienced after the sovereign debt crisis. I think that it is an absolutely relevant level of loss absorption capacity. All in all, I think that this is positive information that I want to leave with you.

If banks were to raise capital in the market, let me say first of all that if I look at recent months, there have been a number of banks which have been able to tap the Tier 2 and Additional Tier 1 markets at conditions that were not so challenging, to be honest. There has been, of course, a slight freeze in these markets around March/April, but I notice now that these markets for capital instruments are starting to be active again. There are other banks which are planning on announcing new issuances. So in terms of these capital instruments, it seems that the market is quite open. I think that for equity issuances, there is of course a strong demand on us to make clear the time frame for the release of the dividend restrictions. I know that these measures have been controversial, but I have always stressed that these measures are exceptional and temporary to deal with an exceptional and hopefully temporary crisis.

I am very keen that if there is no second wave and if there is a sufficiently steep recovery of the economy, these restrictions can be lifted and we can also grant banks a green light to do share buy-backs or extraordinary dividend payments if eventually no further risks materialise.

You said there is a collective action problem of banks being hesitant to lend. I've heard it suggested by some officials that new legislation might be an option to resolve that problem. What might that new legislation look like? Do you think that's a good idea? When might you be in a position to consider that?

The second question, if I may: you mentioned there'd be an exit strategy set out by the ECB very soon so that banks know when they have to rebuild their capital buffers after the crisis is over. When might you be in a position to set that out, what uncertainties do you need to resolve and what might that look like?

On new legislation: as you know, the train is leaving the station, the Parliament and Council have come to an agreement on a legislative package which is being finalised right now. So I don't think we will have any room to address this issue right now. In general, the automatic constraints to payment as they are framed right now seem to me effective when there is a single bank going into a crisis: the bank slides down, the capital starts being eroded and you start having constraints to payments kicking in. However if you have a systemic crisis with a number of banks approaching the wire, then you can have all the banks starting to deleverage at the same time, to avoid hitting the constraints. This could have an adverse macroeconomic effect, so that's roughly the concern that we have right now. But this is in the legislation and there is little that can be done at the moment. I think that after this crisis is over, we will have to take stock of these issues and try to go back to the drawing board and see whether we can simplify and clarify somewhat the framework.

On the exit strategy: again it's a terribly difficult challenge for us. I understand that the banks would like to have more clarity. At the same time, for us it is very difficult to give a date on which we will request the banks to replenish buffers. We don't know yet if there will be, as I mentioned, a second wave of contagion and lockdown measures. We could have the crisis protracted for much longer. It would be inappropriate to ask banks to replenish while we are still in the middle of the crisis. So it's difficult to give a date while we are still under such uncertainty. It is also difficult to give a sort of one-size-fits-all time frame because we expect banks might have different abilities to generate capital internally through profitability, different abilities to tap additional Tier 1 and Tier 2 markets. So probably as supervisors we will be tempted to give indications on a bank-by-bank basis, but this would clash with the requests for certainty. So we are slightly struggling to see how to give some clarity without losing the need for supervisory flexibility to deal with specific cases. We don't have a precise timeline but we will be discussing these issues in the Supervisory Board in the coming weeks. We hope to come out with some clarity hopefully still within the summer.

You indicated that you could look at the regulation of Additional Tier 1 coupon payments; does this mean the rules could be loosened? Would that be a temporary measure or a permanent change you are thinking about?

Second question: if I understood you correctly, you expect banks to loosen lending standards in the midst of a recession. Doesn't it make you nervous, as a supervisor, if the banks are doing that?

Well, on the first point I will not go into details right now. It's not an issue of loosening the requirements. I know that there are strong positions in the Parliament actually going in the opposite direction. I think the point is to reflect all in all on this idea of the capital stack. My colleagues have made a chart, that I think one day we should publish, that tries to show how in a recession you would have the losses coming into the banks and the different buffers and requirements being triggered. So you have all the buffers required, the microprudential buffers, Pillar 2 and the like. Then you have the macroprudential buffers. Then you have the minimum requirement for own funds and eligible liabilities and buffers. Then you have the leverage requirements and buffers. So it's a mind-boggling complexity. This is the first recession actually in which we will test the new framework. I think, I hope, that we can come out of this recession with some lessons that might lead to some simplification both in the capital stack and in the way in which the buffers can be used and released.

The fact that the buffers are used is part of the post-crisis reforms and when the buffers are so high, as I mentioned at the beginning of my remarks, we shouldn't be excessively concerned as supervisors. Of course, we want banks to walk the fine line of continuing to do the proper assessment of the viability of their customers. That's their task, that's their role and they need to continue discriminating between customers which are viable and are likely to go back to paying the debt after the release of the moratoriums, and those customers which instead have more fundamental problems. In general, let me say that, of course, we are also a bit more relaxed because of the significant amount of government guarantees which are applied on these loans that would make the intrinsic risk of the exposures more contained. Of course, however, let me be clear that we want banks to perform their functions as they should.

We will publish tomorrow an interesting piece of work on credit underwriting standards. It's not COVID-19 relevant; it was done before the crisis started, on data before the crisis. But it shows that banks have not always been very accurate in their lending decisions in terms of risk sensitivity, in terms of both the quantity and the pricing of the loans. So it is important that banks remain accurate in capturing the risk of their counterparties.

On market risk: in the CRR quick fix we know the lawmakers are giving you the power that Christine Lagarde had asked for to temporarily exclude Value-at-Risk (VaR) exceptions that were caused by the COVID-19 market shock. Basel standards actually allow supervisors that discretion permanently. Would you like to be given that discretion permanently [by the legislators] so you don't need to keep going back to lawmakers every time there's a market shock and asking for that power?

Then on provisioning and cost of risk: you mentioned that it hasn't gone up that much yet. At the start of this crisis, a lot of people were assuming that the economy would recover very quickly after lockdown. Recently people seem to feel, while some sectors may recover quickly, for other sectors it could be a lot slower or a lot more difficult. Are you having a conversation with banks about which sectors they may need to provision for more comprehensively over the coming months, as well as things like the transitioning in IFRS 9, where they may need to think that these loans are not going to recover that quickly?

Well, on your first question, the answer is simple and is a straight yes. Of course, it would be nicer to have a stronger reliance on the supervisory assessment. Just for those of you who are maybe not into the technical details of this, the point here is: when you have outliers in the performance of internal models, then you would be requested to charge a multiplier. The thinking is that these outliers normally mean your internal model does not work properly, so you are not good at estimating the market risk. But of course, if there is a major spike in volatility and a systemic issue, this is not something that can be attributed to the model of this or that bank. I think it should be squarely in the hands of the supervisor to decide whether there is a market event that warrants switching off this multiplier, or whether it is an idiosyncratic problem of the quality of a single bank’s internal model that would instead deserve the multiplier. I think that the legislator could be a little bit more confident and rely on the assessment of the supervisor in this case.

On provisioning: I would say that, yes, it is true that when the Q1 results were starting to be published, the economic scenario that was available from the ECB was still pre-COVID, basically. So it was difficult for the banks to specifically cover for this event. As you correctly say, we ourselves gave an indication to the banks that they could in their IFRS 9 estimation of expected credit loss also use a sort of V-shaped scenario, with a steep and fast rebound. As you rightly say, the macroeconomic projections that were published last week no longer envisage that type of scenario as likely. There is more of a sort of swoosh scenario, so with a strong dip in 2020 and a gradual recovery that will bring GDP to approaching the 2019 level at the end of 2022, so a much slower recovery. In this case, we expect indeed that the banks will be more conservative. As you correctly say, we expect them to focus quite a lot also on sectoral exposures. There are some sectors of the economy which have been very much hit by the crisis. There are some banks which have concentrated exposures towards these sectors, so it's important that in making their provisioning decisions, they look to this aspect as well.

Just as a piece of information: we made a calculation that the significant institutions under our supervision would be able to withstand a 30% loss on loan exposures towards the sectors which have been severely hit by the crisis. So there is still, again, another message of significant average ability to withstand these losses. But still, of course, the supervisors will need to look at the detail of the distribution at those banks which have more concentrated exposures.

Now that banks are relying more than ever on teleworking, I was wondering whether you had identified vulnerabilities related to cyber risks, and whether you are working on new recommendations to address these potential vulnerabilities.

My second question is on the nature of the supervision that is carried out. The on-site inspections at the moment are not possible. In the current situation and in the coming months, what do you think this could mean for the nature of your supervision? How could you better address the problems it may create?

Well, thank you very much for your question because actually this is a point that I should have also highlighted in my remarks. Indeed, we have focused quite a lot on operational risk since the very beginning. Also, a lot of the measures that we took on day 1 in March were aimed at providing banks with operational relief to enable them to focus exactly on the operational challenges that were created by the COVID-19 crisis: moving to teleworking, shutting down branches, interacting with customers through virtual channels, and also the exposure, of course, to IT risk and cyber risk. We are about to publish a very interesting report on IT risk, which follows a questionnaire and self-assessment that we conducted with the banks last year.

It's a very interesting report that highlights a number of issues on which we are focusing our attention and which are putting increasing pressure on the banks. We also have a regular cyber incident reporting framework within which incidents are reported to us. I don't think I noticed a spike in these types of incidents. There are a few which are of course taking place, but I would say that it's a little bit heightened, but not a major deterioration. It's definitely an area in which we are working quite a lot and we are asking banks to increase their focus significantly. We have been preaching in the desert for some years now for banks to invest more in technology and to deal with end-of-life IT systems and to make sure that they have a more integrated way of managing their data. I hope that this crisis will leave us a positive legacy, in that banks now understand how important these issues are.

On on-site inspections, I would say that it is indeed one of the strengths of our supervisory model, the fact that we rely extensively on on-site examinations both for regular inspections and for internal model investigations. In both cases, we have relied quite a lot on the on-site visits. It is a serious issue that we have had to suspend these on-site visits. As we know, the travel bans could last for longer than we would like them to, honestly, but it's a fact of life. We are also starting to consider possibilities to run desk-based on-site inspections, so asking banks to convey to us credit files and running them remotely. We'll see how this will develop in the future. But I don't envisage a total shift out of the on-site tool. I think that we will remain heavily reliant on on-site inspections also in the future. It might be that we will have to mix this on-site element with more off-site, desk-based type of reviews going forward. There will be a new normal also in that, from some point of view.

You said it was premature to talk about a bad bank, but I understand this is very sensitive within the ECB and elsewhere, since it will obviously require a huge political discussion. Why wait until the house is on fire, i.e. until we have a huge pile of NPLs, before talking and negotiating about this?

Also, is it possible for you to tell me what you think are the advantages of a bad bank European common scheme in general? A source of mine has said that he thinks that one of the advantages will also be that within the common scheme banks will have more time to make non-performing loans performing again. Is that one of the advantages that you see from such a scheme?

Your question is: why wait? In order to consider the possible need for measures, we need to have a policy case. We need to have evidence. At this juncture, we are in a situation in which, unlike any crisis I remember of the past, there is a massive wave of support which is being deployed towards banks' counterparts, towards non-financial corporates. There are, these days, major corporates being re-capitalised with government schemes. We have a massive European support scheme which is being deployed, a significant activation of the fiscal levers. So if I go now to the table of finance ministers and say, “I’m not entirely sure there is a need, but why don't you put some money on the table for a possible scheme”, I think that would not be a very serious and professional attitude. I think that we need first to assess the ability of the relevant buffers that I mentioned before to withstand a major shock in the current situation. The difficulty of this exercise is exactly factoring in these very diverse and in some cases very extensive guarantee schemes which have been put in place by different governments: whether the net effect of the significant deterioration in the macroeconomic situation and of the significant support measures that have been deployed by different Member States will still be so worrying for European banks as to warrant other instruments. At that time, of course, we will have an assessment and we will be able to engage in a discussion at the policy tables.

On the asset management company, let's say that the beauty, in my view, of an asset management company is that it buys time – exactly as you say. It is likely that, after a while, if the assets are properly priced and if the assets which are moved to the scheme are properly managed, many of these schemes have actually ended up in the black, so making profits or at least not making losses. They have managed to clean the banks' balance sheets very fast and restore the ability of the banking sector to focus on new customers, on new loans and on helping the economy recover. On the other hand, they have not generated massive losses on government balance sheets. They are interesting tools, they work well in a number of cases; they have been deployed in Ireland, Spain, Slovenia and Germany. It's a tool which we know, and which can be considered if there is a need. I still hope that there won't be a need and we'll come back with an assessment on this at a later stage.

As you said, the ECB forecasts last week anticipate a swoosh-shaped recovery. Several banks are doing their first-quarter results; they expect risk provisions to peak in the second quarter. Do you expect that too? How much of a decline could happen in the third quarter?

What we are doing right now is developing our own estimates on how losses would develop in terms of quantity and timeline under this scenario that the ECB published last week. Once we have our own estimates, we will engage in a dialogue with the banks, and challenge their own estimations. That hopefully will lead to reliable and conservative estimates on the side of the banks, and more consistency across banks than we saw in Q1. Let me say honestly, because I don't want to be misunderstood: I am not criticising banks for what they did in Q1. Given the significant amount of uncertainty that was there at the time, and also our recommendation to consider different types of scenarios and also the government support measures that were being deployed and the possibility of having a sharp V-shaped scenario, I understand that banks have not ventured into making extreme assumptions. So that's absolutely fine to me, but of course we will enter into more robust discussions in the coming weeks.

When thinking about the lessons learned from the crisis, do you think there might be a need for a revision of the accounting standard IFRS 9? After all, you could argue that this standard is not quite as potent because banks had to be given so much leeway in accounting.

I think that, honestly, I don't see much need to change further. There was, in my view, a wrong interpretation of IFRS 9, which was if you have a recession and you start having exposures migrating to stage 2, then you project the losses of today for the lifetime of the loan without considering the possible recovery. I don't think that this was a correct interpretation; I think that both the International Accounting Standards Board and securities market regulators have provided clear guidance that banks could be more through the cycle in estimating the official development of their losses. I think that is something that can remain in the interpretation of the standards, without a major need to change the standards themselves.

Could you tell us more about the ongoing vulnerability analysis for banks, for instance when and if the results will be published and in what form? Above all, what happens if a bank goes under minimum requirements in the adverse scenario?

The second part of my question is about instruments to manage a possible banking crisis: do you think they are adequate? In the last crisis, we saw a lot of problems there. Do you think it is necessary to change state aid rules and the Bank Recovery and Resolution Directive (BRRD) to make crisis management more flexible?

Well, on the first question, the Supervisory Board has not yet taken a decision. My personal view would be that we should publish the results of this analysis. We envisage that it should be completed towards the end of July. We will use this, as I mentioned, to challenge the banks, to discuss with them. At the moment, this is not a traditional stress test done to point a finger at those banks which are below this or that threshold. There is not this objective, so for the time being, it's just to understand overall how the system would fare in a negative scenario, and try to engage in a robust dialogue with individual banks. In the future we will see whether the tool can be adjusted to other objectives.

On your second question, we have already been quite vocal in saying that the current framework would require adjustments especially because of the patchwork of national rules concerning liquidation, which are very different and enable a very diversified type of response in Member States, including for banks under our supervisory responsibility, i.e. significant institutions. More generally, there are also counterintuitive effects in terms of the application of resolution versus national liquidation. There are also problems in terms of banks that are declared failing or likely to fail, but then they cannot be put into liquidation under the national legislation. So they remain in a sort of limbo in which they have a banking licence, but they are failing or likely to fail. The situation is not yet ideal and would need further reforms.

Let me say that, all in all, having European authorities, ourselves, the Single Resolution Board (SRB), is going to make a difference, I think. Also the fact that DG Competition has already issued a communication switching off, let's say, the requirements for burden-sharing in a number of cases, in case of a systemic event, could make the management of the crisis to some extent easier. I hope we don't get there, but at least there will be a more accommodating framework for that.

Just two questions from my side. The first one is about consolidation because the ECB and SSM have always put in place policies to favour consolidation and also cross-border consolidation. In this context, how do you see the deal between Intesa Sanpaolo and UBI? I know that you prefer not to comment on specific deals, but recently you gave the green light for the acquisition. So a comment, if you want, could be welcome. In any case, in a more general perspective, do you think that COVID-19 and its consequences, such as the possibility of a fragmentation as you mentioned before, could represent an obstacle to other mergers between banks? Or, on the contrary, could it boost or favour this trend?

The second question is about COVID-19 and its effects on funding. The pandemic could translate into rating downgrades for some banks. If I'm not wrong, the ECB is probably going to buy junk bonds but not senior bonds issued by banks with a junk rating. So do you think that there is a need to help the banks in terms of funding or not?

On the issue of mergers, as you already pointed out, I will not comment on individual cases, but yes, we have been supportive of consolidation, both domestic and cross-border consolidation. These can fulfil different purposes. Domestic consolidation could enable greater cost efficiency gains in terms of overlapping distribution networks. Cross-border mergers would help in terms of revenue diversification and private risk-sharing, so making the whole area more resilient to idiosyncratic shocks. Both types of consolidation would help address the excess capacity and profitability issues that we have in the banking sector. When I started my job here, I got a lot of feedback from industry representatives, market participants, that there was a perception that the ECB was looking negatively at consolidation. I realised that this was not the case, so we will soon come out with some clarification of our guidelines on how to deal with consolidation. This should help the market understand how we use our powers, how we perform our responsibilities in this area, and give clarity that indeed we support this type of development.

Will COVID-19 support consolidation? Well, it might be the case that banks are faced with a further erosion of their profit margins that further signals that their business model is not viable; they might have asset quality problems and might be actually forced to consider alternatives that they've not been willing to consider so far. It might also be that other banks consider repositioning their business model strategically. There are some areas in which the size of the European banks is not sufficient for them to actually punch their weight at the global level. It might be that some banks have also considered that as an opportunity. I hope that we will give clarity and we will support this process going forward.

On funding, I think that the policy developed by our colleagues in monetary policy has been very accommodating. I think that banks should be quite grateful for the strong support that they are receiving in terms of funding facilities at the ECB. Also, the recent review of the collateral policies has been very supportive, so I don't think that there is, at the moment at least, much more to be done.

I wanted to come back to the point you made about the reluctance of banks to tap their buffers. Do you think it's possible to change that mindset, and how are you going about that?

Secondly, just in a general sense, if there is a deterioration in the autumn or we see this big spike in NPLs, what tools do you have left as a supervisor to tackle that?

Well, the question is spot on and it's very difficult for us to change that type of mindset. What we have been doing so far has been to engage with banks, rating agencies and market analysts and try to make sure that everybody understands that the use of buffers is exactly what the post-reform regulatory framework was envisaging. So we should all learn to make this system work. So for the moment, the only thing I can do is a bit of education for everybody. I hope you can help also with public opinion that buffers are there to be used and they are to be replenished in good times. That was one of the major indications that came out of the crisis.

On your second question: if we have a wave of non-performing loans, we have the policies in place to manage those non-performing loans. The banks should start preparing to manage them; they should look again at our guidance on how to set up specific policies for addressing non-performing loans, setting targets and the like. We will play by the set of practices that we have been putting in place since the sovereign debt crisis, which have been very effective, to be honest. We have seen a massive improvement in the asset quality of the banks in recent years. So the policy is working very well and, as I mentioned before, if the mass of loans is even bigger, we will have to consider additional measures. However, for the time being, we are focused on the functioning of our current policies.

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