15 February 2023

SSM's Donnery: “Banks are not overregulated”

Since your last interview with us five years ago, a lot has changed. How has the Single Supervisory Mechanism (SSM) evolved since then? 

Firstly, I think the SSM has gone from strength to strength. As we approach the anniversary of our first decade, we all have a lot to be proud of. One thing that has really struck me is that we see deeper integration across the SSM, embracing a common supervisory culture, with an emphasis on outcomes. The sense of community and belonging has developed, which I am very happy to see, with staff in the national authorities and the ECB all central to so many of the SSM’s core responsibilities and projects. This common culture, co-operation and collaboration is something we will continue to build on in the coming years.

The pandemic, Russia’s war on Ukraine and high inflation have created a challenging macro environment. What does this mean for banks and supervisors?

Unsurprisingly, this is one of the main features of my discussions at home and abroad. It is heartening to see the people of Europe welcome so many Ukrainian refugees as a result of this awful war and the humanitarian crisis it has caused. The war continues to create considerable uncertainty for the economy and financial system. In terms of supervisory concerns, asset quality has continued to improve in recent years. But prevailing inflationary pressures and lingering effects from the pandemic will pose challenges to borrowers’ repayment capacity and will require a robust approach to provisioning. While some institutions may experience short-term positive effects from rising interest rates, the wider effects from asset re-pricing and from cost drivers will put pressure on profitability. Liquidity risk, somewhat muted over the last number of years when monetary policy was more accommodative, will also require more supervisory attention.

But stepping back for a moment, our job is fundamentally about stability for European citizens. Given the external challenges, I think it is essential we remain focused on the core elements of our job. I am pleased that, as with the pandemic, the SSM has quickly focussed its attention on the key elements of these risks, and we will continue to prioritise them this year.

You spearheaded the ECB’s work on non-performing loans (NPLs) and the 2017 NPL guidance to banks. NPL ratios have decreased significantly since then, but current developments may result in higher NPLs again. Are banks better prepared nowadays?

Banks are much better prepared today than they were in the past. I think our work on the NPL guidance, the supervisory follow-up and targeted work on issues like leveraged finance and CRE puts us in a good place. The strengthening of the framework more widely, including higher levels and quality of capital are also central to the increased resilience. We cannot however be complacent, and the supervisory engagement will be important this year.

Banks’ advancements in complying with the Basel Principles for effective risk data aggregation and risk reporting (BCBS239) have been slow and unsatisfactory. Why is that, and what can be done to address the banks’ inertia in this area?

It is true, progress here has been slower than expected. For me, the governance element is key. The commitment of management bodies in banks to giving this the attention and resourcing it needs is crucial to making progress. For our part, this area will continue to be a focus of supervisory attention, given the importance of this issue to the prudent management of banks. Better risk aggregation delivers enterprise-wide benefits, in terms of effective governance and risk management, and the robust financial planning which delivers sustainable business models through the cycle. This allows banks to better play their role in the wider functioning of the economy and society. As long as this is seen as a “box-ticking exercise” and regulatory initiative, banks will not reap the possible benefits. More broadly, this issue underlines the importance of us having a clear escalation framework for how we engage with banks to ensure there is the required level of focus and oversight.

SSM

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