10 February 2014

FT interview with Danièle Nouy, Chair of the Supervisory Board of the SSM

“We know we have a single opportunity to establish our credibility and reputation", said Danièle Nouy in her first interview since taking charge of the euro area’s new banking overseer, the Single Supervisory Mechanism. “There is a firm commitment to do whatever has to be done to make sure the SSM banking sector is seen as sound and safe and transparent.”

Ms Nouy also signalled she wants to weaken the link between governments and the bloc’s banks that lies at the core of the region’s crisis by breaking with tradition and demanding lenders hold capital against their sovereign assets. “One of the biggest lessons of the current crisis is that there is no risk-free asset, so sovereigns are not risk-free assets. That has been demonstrated, so now we have to react", Ms Nouy said. “What I would admit is that maybe it’s not the best moment in the middle of the crisis to change the rules – that’s possible. This being said, there is the possibility to do more and some countries are applying stricter rules.”

Ms Nouy agreed with Mario Draghi, the president of the European Central Bank, that the ECB’s upcoming health check of the region’s biggest lenders would need to see some institutions fail to be credible. “We have to accept that some banks have no future", she said, parrying speculation that a wave of consolidation could save the currency bloc’s weakest lenders. “We have to let some disappear in an orderly fashion, and not necessarily try to merge them with other institutions.”

Ms Nouy said that, on the whole, European lenders were in a better state than investors thought and hoped that the health check would prove this by providing more transparency on banks’ assets. Her readiness to countenance bank failures will trigger alarm among national politicians reluctant to see local lenders go to the wall. Italy has moved to reject the idea of setting up a “bad bank” for fear that it will focus market attention on the exposure of Italian banks to a rising level of non-performing loans and put the country’s credit rating at risk.

Ms Nouy expressed consternation at the recent probe into allegations that banks fixed foreign exchange rates, along with doubts that lenders were following the spirit of new EU rules on bonuses. “From the point of view of governance and internal controls, it’s quite shocking to see banks acting this way. It’s not only a matter of capital requirements", she said. “Human nature being human nature, I don’t believe that the lessons are learned forever. So we have to be cautious and vigilant supervisors because, after a certain period of time, the lessons are forgotten. That’s for sure.”

Ms Nouy was adamant the SSM “will not be shy” about grabbing power from them if necessary. “All the banks will have to be supervised from the same manual, the same rules ... and the ECB can take supervision directly of a small bank. It’s difficult to say how often we will exercise this kind of power, but we are fully committed to do it as often as needed", she said. “If we have a doubt, if we believe that it makes sense, we will just do it. You have to demonstrate that you are serious about it.”

As one of the regulators who presided over the setting up of the Basel II accord on bank capital, which stressed risk-weighted assets as the best measure of a lender’s health, Ms Nouy also admits her thinking on how banks are assessed has evolved. She now believes the leverage ratio, which compares a bank’s capital with its entire assets, is also a crucial measure. Yet some European banks have criticised this approach and complained that it puts them at a disadvantage compared with their US peers. The message from past banking failures is that supervisors have little choice but to make harsh decisions, Ms Nouy warns. “Whether it makes them unpopular is not a problem.”

Full Financial Times article (subscription)

Further reporting (subscription)

Transcript of full interview with Danièle Nouy - ECB-website

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