05 May 2020

SSM's Enria: Public hearing at the European Parliament’s Economic and Monetary Affairs Committee

Our first decisions were announced on 12 March, only three days after the first nationwide lockdown in Europe.This morning, I would like to further explain the reasoning behind those decisions and the additional ones that have been announced since then.

In these difficult and challenging times, I want to thank you for the opportunity to discuss the work of ECB Banking Supervision and how our work can support households, companies and banks dealing with the fallout from the pandemic.

I had been scheduled to appear before your Committee in March, to present the 2019 ECB Annual Report on supervisory activities. However, that hearing was cancelled due to the ongoing coronavirus (COVID-19) pandemic, and there have been important new developments since then. Nevertheless, the Annual Report is a rich source of information on our banking supervision and presents a comprehensive overview of our work over the past year. I will be happy to answer any questions you may have.

In my introductory interview to our Annual Report, I argued that European banking supervision was proving its value, that the idea of supervising banks at the European level was sensible and practical, and that the pillars of our supervisory model were sound.

All of this is still true today; although since then, we have witnessed an unprecedented global crisis, the consequences of which are still largely unpredictable. As I see it, the fact that we now have a banking union in place allows for a much more unified and timely response to this crisis than was possible at the time of the global financial crisis in 2008.

Also, unlike the global financial crisis, this crisis did not originate in the banking sector. And thanks to stricter European regulation and supervision in the aftermath of the global financial crisis, euro area banks have much stronger balance sheets than they had before 2008.

But this crisis has already affected banks in a number of ways. In this first phase, corporations and small businesses have been drawing significantly on credit lines. So far, banks’ robust balance sheets have helped them to support businesses in this way. As supervisors, we have adjusted our supervisory work to the crisis and focused on ensuring that banks can continue to support the real economy in the future – and that they will also be able to support a recovery.

Much uncertainty remains as to how long this crisis will last and how deep it will be. On the positive side, we have seen decisive action from public authorities. National governments have introduced moratoria on payments of credit obligations and have provided public guarantees to ensure that banks continue helping small, medium-sized and large enterprises. In this respect, I welcome the European Banking Authority’s (EBA) guidelines on public and private moratoria, which in our view strike the right balance. They clearly set out the criteria to be fulfilled by payment moratoria in order not to trigger forbearance classification; and they help address short-term liquidity difficulties arising from the limited or suspended operations of businesses and individuals as a result of the COVID-19 pandemic.

As a central bank, the ECB has taken significant measures. ECB Banking Supervision has also done its part – delivering a swift European response to the unfolding crisis. Our first decisions were announced on 12 March, only three days after the first nationwide lockdown in Europe.

This morning, I would like to further explain the reasoning behind those decisions and the additional ones that have been announced since then.

First, let me clarify that the prudential measures taken by the European Commission, the EBA and ECB Banking Supervision are all coordinated and complement each other. Second, there are important synergies between our supervisory measures and the ECB’s monetary policy actions as a central bank. And third, in combination with the very relevant measures announced by national fiscal authorities, they represent a coherent package to support our economies in the difficult transition to the recovery after the COVID-19 shock. Today I will focus on ECB Banking Supervision’s decisions.

The basic idea behind our measures was to support banks in continuing to provide credit to households and to viable small businesses and corporations hardest hit by the current economic fallout.

So how did we do this? When deciding whether they can issue a new loan, banks have to take a number of constraints into account. For one, they need to ensure they hold enough capital to back the loan. After the last crisis, we worked to ensure that banks built up capital buffers in good times, when the economy was strong, to use them in bad times. Unfortunately, we are now experiencing such bad times. As the banking supervisor, we have therefore temporarily eased our expectations for banks’ buffers, thereby using the flexibility available within the framework without undermining the previously agreed reforms.

This is why we announced that banks would temporarily be allowed to operate below the level of capital defined by the Pillar 2 guidance and encouraged them to fully use their capital buffers, and this for as long as necessary. Further, we acknowledged that, in recent years, banks have made good efforts to hold large liquidity buffers. In line with international standards, these buffers can now be used in times of stress, even if this brings banks below the minimum level of 100%. We also made clear that banks will have ample time to rebuild the buffers after the crisis.

We have also observed extraordinary levels of volatility in financial markets since the outbreak of the pandemic. This pushed up the quantitative market risk multiplier, which can rise when market volatility has exceeded the levels predicted by a bank’s internal model. While the international prudential rules of the Basel Committee on Banking Supervision do provide for the legal possibility to smoothen such one-off events in market risk models, such provision is not fully available in our legal framework. Therefore, we have stated that we will temporarily reduce the qualitative market risk multiplier. We will review this decision after six months.

As I have mentioned, euro area governments have taken important decisions too, such as introducing payment moratoria and guarantees on bank loans. In response, we have shown our supervisory flexibility regarding the regulatory treatment of loans receiving such public support, while maintaining proper risk identification practices and risk management incentives.

Beyond prudential rules, we also need to consider accounting rules. These rules affect the published financial statements and the regulatory capital of the banks we supervise. Within our remit, in order to avoid excessive procyclicality of regulatory capital and published financial statements, we asked banks to avoid procyclical assumptions in their expected credit loss estimates under the International Financial Reporting Standards 9, or IFRS 9.

We also provided some operational relief. Banks face significant operational challenges, and we have taken this into account. For example, we halted, for at least six months, the finalisation or implementation of various supervisory decisions. And we will also use full flexibility in evaluating the implementation of banks’ ongoing plans for reducing past non-performing loans, or NPLs.

As I have said on other occasions, I believe that all of this support should not be a one-way street. This is a tragic and unprecedented crisis, which also requires a contribution from banks and their shareholders.

ECB Banking Supervision has therefore recommended that, until at least October 2020, banks should not distribute dividends to shareholders for the 2019 and 2020 annual reporting periods. Banks should also refrain from share buy-backs aimed at remunerating shareholders. It is vital at this stage to keep as much capital within the banking sector as possible.

Beyond the multiple support measures applied within existing rules, I also welcome the European Commission’s proposal to introduce targeted amendments to the Capital Requirements Regulation.

The Basel Committee has recently agreed limited changes to the post-crisis prudential framework, which should be implemented in the EU. This notably includes a delayed timeline for implementing the final elements of the Basel III framework. It is important to note that this change in the timeline should not affect the substance of the reforms. We remain committed to bringing these reforms across the finish line, as they embody important lessons learned from the past crisis which remain valid today.

The European Commission’s proposal also introduces additional adjustments so banks can further support the real economy, in the specific context of the unfolding crisis. I particularly welcome the revised treatment of publicly guaranteed loans under the prudential backstop for NPLs, in line with the supervisory flexibility that we are giving to the treatment of NPLs.

This is a timely legislative proposal and I hope the negotiations among co-legislators will be completed swiftly.

Finally, a few words on what lies ahead. Our first goal has been to ensure banks can contribute to the recovery from this crisis, by continuing to finance households and businesses. At this point, it is hard to accurately predict how the crisis will unfold. As prudential supervisors, it is our role to prepare for the worst and hope for the best. We are conducting an analysis of banks’ vulnerability, taking into account different scenarios and hypothetical shocks. This analysis will give us a good understanding of how the crisis could affect banks, where the greatest risks lie and what can be done to mitigate them. Also, our Supervisory Review and Evaluation Process (SREP) for 2020 has been totally rewired to focus on the unfolding risks for individual banks and their ability to manage them effectively.

More generally, we should also closely observe how the ongoing crisis is affecting our efforts to complete the banking union. Many support measures that affect banks’ balance sheets are taken at national level, so there might be a temptation to develop policies aimed at protecting local establishments and to unduly focus on their lending to national customers. A national bias in policy responses would not only perpetuate the segmentation of the banking sector along national lines, frustrating the key objective of the banking union. It would also result in the crisis being managed less effectively by cross-border groups and, ultimately, hinder a swifter and more dynamic recovery once we have come through the trough of this crisis.

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