07 September 2014

European Central Bank: Sabine Lautenschläger Interview

Ms Lautenschläger, you are a member of the six-person Executive Board of the European Central Bank. In a few weeks, the ECB will be entering what is practically a new era. You are taking over supervision of the most important European banks. That is a balance sheet of more than €21 trillion. The question is, therefore, are you up to the task? Are you ready for take-off?

We are ready to start, or we will be ready to start in November. We have taken on quite an astonishing number of highly qualified staff. So far, there are 28 nations represented here.

So, how well prepared are the large European banks for this supervision? We hear that Deutsche Bank has already obtained a lot of capital and so on. What would you say? Are they well prepared?

Well, the capital has more to do with whether one is prepared for the health check. In that regard, I would say that some have done their homework. Since July 2013, more than €140 billion has been added in additional capital or by reducing business etc. That is quite a sum. But supervision is not just this health check. Instead, it concerns the fact that, as a bank, I would have to adjust to a new supervisor. What supervisory culture does it have? How tough is it? How seriously does it take certain things? How quickly will it actually want to see deficiencies corrected etc? And that is what the banks are preparing themselves for. And, finally, it also concerns the fact that banks are now going to have to do everything in English and not in German.

While we’re discussing the health check – this time it’s a bit different than in the past. You are first conducting an inspection of the banks’ balance sheets. Why?

Well, the stress tests which we have seen so far were applied to the valuations made by the banks themselves for their operations, that is to say for the individual contracts, for the individual transactions. I would put a question mark over whether those valuations were occasionally a bit too positive, whether, ultimately, the starting position to which the stress was applied – assuming more or less that an economic crisis was developing and looking at how the value of these transactions developed – was too positive. Therefore, this time, we have looked at the most significant, most risky transactions of the banks and gained an impression of the valuation standards. We have also valued individual transactions ourselves in order to see where we might have to reduce the valuation of individual transactions and then apply stress to this reduced value.

The ECB is now the supervisor and, at the same time, the central bank. Is there not a danger that this will somehow become mixed up?

On one hand, there are synergies to be gained. It is good as a supervisor to also have the knowledge that a central bank has, for example, about an economic environment, about the markets, about infrastructures such as payment services. In this area, therefore, there are synergies to be gained, simply by exchanging information. On the other hand, it is of course the case that, when you conduct monetary policy, you always have an eye on the banks as a transmission channel, and then conflicts of interest can, of course, be expected. Let us assume, for example, that you provide emergency liquidity assistance to banks and, at the same time, as banking supervisor, you ask yourself: “Is this bank still solvent?” That would, for example, be such a case. For this case, we have very clear rules. They were laid down for us by the European legislator, but we also impose them on ourselves. They concern the fact that, ultimately, the decision-making channels, right up to the Governing Council of the ECB, are kept fully separate. That means that the central bank side, with the exception of the Governing Council, does not know what is being decided or prepared on the banking supervision side, and the banking supervision side does not know what is being prepared on the central bank side.

We will come to the other measures in a moment. Staying briefly on the subject of the low interest rates, because that is of real interest to many of our listeners who are looking at their savings and life insurance and saying: “What is the ECB doing? Is it actually conducting monetary policy against me as a saver?” What would you say to them?

I would say that the ECB is not conducting monetary policy against your listeners as savers. I have a lot of understanding for the fact that savers are concerned. I am, by the way, also a saver. But I believe we must not think so short-term, but more middle and long-term. And you have to simply recognise that you can’t save if you don’t have a job. And if, at the end of the day, the economic environment is so weak that economic growth cannot be generated, then we at the ECB must consider how we can ensure that economic growth is generated and that inflation rises from the, as mentioned, very low inflation rate of 0.3%? How can we ensure that jobs are safe and remain or that new jobs are created? And not only for Germany, but for the euro area as a whole. We are not conducting monetary policy for Germany alone – that is a very important point! And with this interest rate cut, which is one measure among a package of measures – also a very important point –, another small input is ultimately being provided and the lower limit has been reached. Again, the low interest rates are, unfortunately, justified at this time. It is my conviction that they, of course, also entail risks, and therefore it is also my conviction that, if the conditions improve, then we should, of course, also allow interest rates to rise again.

So you can give people a little hope when they look at their savings books and their pensions that things will not remain as they are, that you will also become active again and raise interest rates?

Well, things will remain as they are as long as the economic conditions remain unchanged. In our projections, inflation is too low over too long a period of time. And that is what we must respond to, because our mandate is price stability, and price stability means upwards as well as downwards. That means, if we have inflation that is too low, with all the dangers that I have already described to you, then we must also respond to that.

Is there, as a result of the cheap money, a threat of bubbles, for example in the property markets?

That is often mentioned as one of the risks. And, yes, there are such side effects. If we are talking about possible bubbles in the German property sector, I can tell you that so far we cannot detect any. Nor does the Deutsche Bundesbank see any. We can detect overheating here and there in certain areas in certain cities in Germany. However, a bubble is not generated through rising prices alone, but also through a simultaneous rise in credit growth, which, in the end, is what finances such bubbles and such overheating. And we cannot detect that. I would say that, until the middle of the year at least (I don’t have the latest figures yet), credit growth in the property sector in Germany was not extraordinary, but, rather, at the lower end of the scale.

Full interview

© ECB - European Central Bank