23 January 2014

ECB/Draghi: Interview with Neue Zürcher Zeitung

In several months’ time, the ECB will take over supervision of large euro area banks. Will we no longer see banking crises after that?

Since the outbreak of the financial crisis, banking regulation has made huge progress all over the world. In Europe, approximately half a trillion euros of additional capital has flowed into the banking sector in the past three years alone, half of it from private sources. But I would never say that these improvements mean that there will be no more crises. Nobody knows where the next crisis will come from. It is therefore important to make the financial system as a whole even more resilient.

But are there not simply too many banks in Europe?

That is very hard to say. The ECB’s asset quality review of the banks that is currently being conducted pursues one goal in particular: we want to shed more light on bank balance sheets and therefore indirectly also on that issue. The markets and investors should know what state Europe’s banks are really in. We want full transparency. Only through transparency will investors be ready to provide additional capital for banks.

Yet this means that the ECB’s audit of the banks could itself become a systemic risk. If the ECB were to notice very large capital shortfalls or a large number of banks that are not capable of surviving, this would potentially trigger a new banking crisis.

I see it completely differently. If there are problems in Europe’s banking sector, they are there, regardless of whether we uncover them or not. In the financial system in general, light is always better than darkness. Only by uncovering weaknesses in the banking sector can measures be taken to correct them, be it through recapitalisation, restructuring or winding up banks. Without transparency, the weaknesses will remain and put a strain on the whole economy. After all, weak banks do not lend. We have learnt the lessons from Japan in the 1990s that a weak banking sector inhibits growth for years.

The consolidation of the banking sector in Europe since the crisis has made less progress than in the United States, so there should be much remaining to be revealed.

If you look solely at the number of banks that have been wound up, that is certainly true. In the United States, more than ten times as many banks have been closed down as in Europe. However, the banking structure and business models in Europe are totally different from those in the United States. We will see what needs to be done in Europe – our assessment of banks will bring this to light. Precisely that is what the whole exercise is about: weak banks should exit from the market. We are taking this very seriously. Should there be any weakness, we will reveal them, and will take appropriate countermeasures.

Are you happy with the resolution mechanism recently adopted by the governments?

It is a first step. We are now getting a common mechanism, a resolution authority and also a joint resolution fund. It will take 10 years for that fund to be filled, which is too long, of course. The proposal that has been put forward must be developed further in the next few weeks, but it is a good starting point.

With regard to the forthcoming assessment of banks, do you believe that the governments will be prepared to take action if it becomes necessary to cover banks that have run into financial difficulties?

Yes, they have committed themselves to do so both at the level of heads of state and government and at finance minister level. Moreover, there are clear bail-in provisions in place that will call the banks’ creditors to account. We did not have such rules when the crisis erupted. In future, it will no longer be the taxpayer who has to step into the breach in the event of bank failures.

Are you optimistic in this respect? Will the taxpayer really not be called upon to pay the bill in future?

That is not a question of optimism. The new rules afford the taxpayer far better protection. I am confident that the bail-in rules will be complied with and that taxpayers’ money will only used as a last resort.

Is the ECB really the institution that should deal with banking supervision? Aren’t you afraid of reputational risks?

Not really. We will keep supervision strictly separate from monetary policy. The supervisors will have to take care of their reputation with respect to banking supervision, while the monetary policy-makers will take care of their credibility with respect to price stability. I actually believe that our monetary policy will become more effective if supervision is carried out well, because healthy banks will ensure that our monetary policy is better transmitted to the real economy.

Full speech

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