Interview with Andrea Enria, Chair of the Supervisory Board of the ECB, by Yasmin Osman and Kathrin Jones, conducted on 5 October 2020 and published on 12 October 2020
Mr Enria, we spontaneously decided to meet face to face for
this interview. That is still quite a rare occurrence these days. Have
you generally gone back to working from the office instead of at home?
Until the start of next year we at ECB Banking Supervision will, in
principle, continue to work from home. But in the meantime staff members
who wish to work in the office again are allowed to do so, as long as
they follow the distancing rules. I go to the office three or four days a
week – last week I was actually there every day. It’s great to see
colleagues in person again.
What was the working from home phase like for you?
I did find the shutdown tough, especially as my wife was in Italy
during that time and I was on my own at home. But work carried on
surprisingly efficiently and effectively – a lot of people experienced
the same thing, including at the banks.
As a supervisor don’t you catch more, especially informal things, when you inspect banks on site?
is indeed quite different when you can talk to people directly.
Detailed on-site inspections are very important to our supervisory
philosophy. In that sense the pandemic has had a major impact on us. But
the banks have been able to provide us digitally with a lot of the
information that we would otherwise ask for on site. In some cases they
have even provided laptops with direct access to their data.
Isn’t that something you could also continue after the coronavirus crisis?
in future we will integrate these experiences into our supervisory
approach. Before the coronavirus this kind of on-site inspection took
twelve weeks. If we prepare more intensively in future using digital
methods, we might be able to reduce the time it takes. That would be
good for our budget and for the environment.
On the other
hand, in the spring you must have felt helpless sitting in your office
at home looking at all the projections about the bad loans that were
going to hit Europe’s banks, right?
If a huge wave of
non-performing loans is coming towards you, it doesn’t matter whether
you are in the office, working at home, or at the beach. It’s never a
good feeling. However, our top priority in the spring was initially to
prevent the banks from tightening their lending standards too much.
Excessive caution could have led to a massive credit crunch, which could
also have wiped out a lot of companies that are actually viable.
You allowed banks to reduce their capital buffers significantly during the pandemic.
but since July we have been urging banks to analyse in more detail what
effects the extraordinary recession triggered by the pandemic is having
on their asset values. The banks should take a long hard look at their
loan books and work out which of their clients are really going to
survive the crisis. The banks need to make a start on this now, so that
the wave of bad loans doesn’t have a chance to get too big.
Are banks already doing this?
say there are three groups. A few banks have already started
reassessing their clients’ bankruptcy risk. Other banks, while not
reassessing individual loans, are nonetheless building up a general risk
provision for their loan portfolio as a precaution. I consider that a
prudent approach as well. And then there are still the optimists who
prefer not to do anything until there’s a clear-cut indication that one
of their clients is going to go bust.
How many optimists are there among the banks?
can’t say, but our supervisory teams are analysing these banks very
thoroughly and are discussing things with them in great detail. It is
not wise for a bank to put off such a step until the last moment and
wait for moratoriums to expire. If many clients subsequently fail to
pay, everything will unravel at once. We think it’s important that banks
also start now to build up their organisational capacity to process bad
loans. This also applies to those banks that, up to now, haven’t had
many problems with bad loans.
How significant could the volume of bad loans be following a wave of insolvencies in the economy?
the economy evolves in line with our baseline scenario, the banks
should be able to handle the expected increase in non-performing loans.
But there is a lot of uncertainty as to what could happen next. Under a
severe scenario with a second wave of contagion and containment measures
we have calculated that there could be up to €1.4 trillion in bad
loans, which is more than after the last financial crisis. And it’s
still too early to rule out this severe scenario. That would have
material consequences for the banks’ capital positions.
So relaxing the rules on bad loans to enable banks to issue more loans isn’t an option, is it?
absolutely convinced that it’s better for the banks and their clients
if bank balance sheets are cleaned up as fast as possible. If that
doesn’t happen, the bank is dysfunctional. Instead of taking care of new
clients, it uses lots of capital and human resources to service clients
that are presumably never going to be able to pay back their loans. I’m
very glad that we introduced rules and supervisory practices after the
last crisis to force banks to recognise and work off bad loans sooner.
In the current crisis this is more important than ever.
What do you mean by that?
don’t see this crisis as a typical recession, where economic activity
first declines and then picks up again. My impression is that this
crisis will lead to structural changes, which will transform our
economies. Certain sectors will not recover from this downturn to reach
the same levels of activity as in the past. Other areas of our
economies, linked to the development of digitalisation and to green and
sustainable businesses, will be increasing in importance. If the banks
remain focused on servicing non-viable customers in declining
industries, they won’t be able to give their full support to these
Do we need a bad bank to speed up the clean-up work?
think that asset management companies, as I prefer to call them, can be
useful tools, and they fulfilled a useful role in some countries after
the last crisis. If they are set up right, they don’t have to cost the
taxpayer anything either. That’s the kind of tool we should develop.
At the national or European level?
believe there are strong arguments for a European initiative. But a
network of national asset management companies can work well too. There
is one mistake that we shouldn’t repeat, though.
the last crisis we pumped a lot of taxpayer money into the European
banking sector, but we didn’t decisively restructure it at the same
time. Despite receiving stimulus equal to 13 per cent of European GDP,
the banking market came out of the crisis with significant structural
weaknesses: excess capacity, limited profitability, excessive costs and
in many cases institutions without sustainable business models.
What exactly was the mistake?
the restructuring last time was entirely in the hands of the Member
States. So any consolidation was solely at the national level. That was a
mistake. This time, the restructuring should follow European principles
and lead to a more integrated European market.
Will the coronavirus drive consolidation among European banks?
can be part of the solution, for example to reduce excess capacity. The
pandemic could accelerate this process. By the way, I’m not at all
surprised that we have primarily seen domestic mergers. When it comes to
cutting costs, you’ll find that the biggest overlaps in the branch
networks, and therefore opportunities for cost saving, are usually at
the national level. But I think it would be great if the diversification
of sources of income and risks was also considered. And the best way to
do that is with cross-border mergers. That would make banks more
Why does that almost never happen?
are a few obstacles that would need to be dealt with via legislation.
They make it very hard for a pan-European bank to move capital and
liquidity around freely. Until this changes, cross-border mergers are
much less attractive. Of course I understand that in the absence of a
pan-European deposit protection system individual countries prefer to
maintain capital and liquidity at the national level, to protect local
depositors. This is why a European deposit guarantee scheme is so
important. In fact, progress in integrating European banking could and
should be a matter of urgency. Last week I floated a proposal
to rely on intragroup guarantees, approved by the European supervisor,
to alleviate member state concerns and enable a greater pooling of
capital and liquidity at group level.
Isn’t the lack of that deposit protection system just another reason to stick to national mergers?
European governments want the European banking market to remain
national and inefficient, sure. But if we want stronger banks able to
better serve Europe’s households and corporates, then we have to think
Aren’t you worried about banks getting too big to fail?
big for whom? A big bank might be too big for a given Member State, but
if you think of it as a European market, then relative to European GDP
these institutions are not that big, and in any case not bigger than
their American competitors. Some lines of business, i.e. capital market
activities, are only worth it if banks can achieve economies of scale.
That’s why European banks have been losing market share in the capital
market business for years.
The end of the year will also
be the end of the transition phase for Brexit and there is still no sign
of a trade agreement. How dangerous is this for banks?
course Brexit is an additional element of tension in an already tense
situation. But banks have had a lot of time to prepare. We have been
encouraging them since the beginning to prepare for a hard Brexit.
Are you pleased with the result?
has been a lot of progress, even though there are still banks that must
do more. And of course our supervisors are putting a lot of pressure on
those banks. We do understand that the pandemic is making it harder to
move employees around. So we are trying to be a bit flexible about that.
But of course essentially we need to ensure that the banks in the
European Union have sufficient local capacity to ensure a clear strategy
and adequate risk management. This is what we are focussed on.
Banks are complaining that the de facto ban on dividends is making them unattractive to investors. Can you understand that?
the European banking sector wasn’t particularly attractive even before
our dividend recommendation. That was due to low profitability, high
costs, the lack of sustainable business models at certain banks and
insufficient investment in new technologies. Of course I admit that the
ban on dividends has not helped. But it was necessary to avoid capital
flowing out of the sector during the worst recession on record.
Will it be lifted at the end of the year?
will be as happy as everyone else when we can go back to our standard
practice, which is to only intervene and limit the distribution of
dividends for weaker banks. But before we lift our ban on dividends, we
need to be clearer about where the economy is heading. We will also need
to be able to determine how reliable and robust banks’ capital planning
That’s a very long horizon for a measure that was intended as an exceptional one-off.
ban on dividends is an exceptional measure. We do not intend to make it
a regular supervisory tool. It was introduced when governments, the ECB
and ECB Banking Supervision announced a major support package to deal
with the fallout of the pandemic. The ECB has calculated that the full
use of government guarantee schemes might reduce banks’ loan losses by
between 15 to 20 per cent in the euro area. The package was intended to
allow banks to grant loans to households and companies, not to
compensate shareholders. The pandemic led to factory and school
closures, and some of us were locked down for months. Why should
dividends, of all things, be the only sacrosanct element in our
While we’re talking about lockdowns: how much
have you allowed yourself to get back to normal in the meantime? Are you
only going to the office, or also going out to eat again?
wife went through the lockdown in Italy, and that affected her greatly.
We go out to eat much less frequently than before, especially at the
moment, since the weather makes it harder to sit outside.
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