19 June 2017

ECB's Nouy statement at the Economic and Monetary Affairs Committee hearing

Non-performing loans

The quality of banks’ assets continues to be a serious challenge in the banking union as a whole, but the problem is also concentrated in certain countries. Large volumes of non-performing loans, or NPLs, are contributing to low bank profitability and making banks less able to provide new financing to the real economy.

In March of this year, following an extensive public consultation process, the ECB published its guidance on NPLs, which is applicable to all significant institutions. This guidance requires banks with high levels of NPLs to implement ambitious and realistic strategies for reducing the level of NPLs in a timely manner. This supervisory initiative has already started to bear fruit across banks and countries.

Furthermore, ECB is looking into more forward-looking solutions to avoid any such build-up of NPLs in the future. One important condition for ensuring a reduction of NPLs and preventing their future build-up is for supervisors to have sufficient powers to ensure that banks make timely prudential provisions for losses resulting from NPLs. ECB has highlighted the need to strengthen such powers already to the Commission and the Council and to your Committee most recently during the hearing on the banking legislation package in May.

Brexit

Since the 2016 vote by the United Kingdom to leave the EU, the ECB has been preparing for the consequences of this decision. First, ECB is making sure that euro area banks, in particular those with subsidiaries or branches in the United Kingdom but also those with other business ties to the country, have adequate contingency plans in place and are preparing for the possibility of a “hard Brexit”. Second, the ECB is preparing for all operational aspects related to a possible relocation of UK-based banks to the euro area.

Key issues of the banking legislation package from the supervisory perspective

ECB’s key concerns.

• First, although ECB agrees with the need to fast-track the provisions introducing a transitional framework for IFRS 9, ECB strongly believes that the phasing-in should follow a simple static approach that only affects the initial CET1 capital reduction.
• Second, it is important to ensure that supervisors keep the necessary flexibility in their toolkit to perform their tasks and address the idiosyncratic risks of institutions. Against this background, the Commission proposal on Pillar 2, while rightly seeking to strengthen supervisory convergence, frames supervisory action much too tightly in essential aspects.
• Third, the proposal does not provide for an adequate harmonisation of certain key supervisory tools at EU level. These are mainly the powers to make certain deductions in capital to properly address risks which are not fully covered by the accounting rules. This is especially relevant to adequately address the issue of non-performing loans, as I mentioned earlier.
• Fourth, the proposal lacks ambition in terms of further harmonising the EU prudential framework. ECB thinks that much more progress should be made in harmonising Member States’ national options and discretions.
• Fifth, ECB supports the simplification of some rules for small banks, such as those on disclosure and remuneration. But, supervisors should retain the flexibility and discretion to apply regulations with proportionality.
• Sixth, ECB supports the proposal to grant capital waivers within banking groups operating on an EU cross-border basis. This will allow for more efficient management of capital across the EU.

Full statement

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